Hidden Stocks for High Returns

Like the song says, investors are looking for stocks to love in all the wrong places. They'll pile into the momentum stocks everyone else buys, but ignore lesser-known opportunities for fear of straying from the crowd. Overlooked by Wall Street and Main Street, and thus undervalued, these stocks hold the best potential to deliver outsized returns.

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find three under-the-radar stocks that brim with promise. These companies have garnered 100 or fewer active recommendations on CAPS, though the community thinks they still have outsized potential.


CAPS Rating
(out of 5)

No. of Active Picks

Est. EPS Growth Next Year

CEC Entertainment (NYS: CEC)




LyondellBasell Industries (NYS: LYB)




RailAmerica (NYS: RA)




Source: Motley Fool CAPS. NA = not available.

Naturally, we want you to look a bit closer at these stocks before buying. Maybe investors are staying away from these stocks for a reason, so make sure there's nothing seriously wrong with the company before you plug it into your own portfolio.

Good-time Charlie
It's probably worth noting that even in an environment with eroding consumer confidence, kid-centric entertainment center CEC Entertainment -- which operates the Chuck E. Cheese restaurants -- was able to beat analyst earnings-per-share expectations, although slack same-store sales pulled revenues down 3.5%.

If you have kids (or know kids or were once a kid) it's possible you've attended an event at one of the company's more than 500 party-themed restaurants, but today's economy has run roughshod over CEC's business. A cross between a pizza joint and an arcade, CEC faces competition for scarce discretionary dollars from Domino's (NYS: DPZ) , movie theaters, and other outlets for fast-food dining and entertainment. Yet it has a unique combination of the two, with its animatronic characters making it stand out from simple pizzerias.

But comps fell 6.3% in the quarter as consumers reined in their spending patterns, and net income was actually down year over year. It was able to report higher per-share profits because it bought back 2.8 million shares. However, CEC boosted its dividend 10% to $0.22 a share, an indication that the company is hopeful about the future.

The nine Wall Street analysts following CEC are unanimous it will beat the broad indexes, and a broad swath of the CAPS community is supportive as well. Let us know in the comments section below or on the CEC Entertainment CAPS page if investors will feast on the stock. Also add it to your watchlist to be notified of the latest developments.

Big payday
Also rewarding investors with dividends is chemical and oil refining specialist LyondellBasell Industries, which declared a special $4.50 dividend while also raising the regular dividend 20% to $0.25 a share. Its profits in the third quarter soundly beat analyst expectations after nearly doubling as higher crude prices and better efficiencies helped revenues jump 29% to $13.3 billion.

It ended the quarter with more than $5.6 billion in cash on its balance sheet; it will use a portion of that to begin a tender offer to buy back $1.47 billion of 8% senior secured notes and up to $1.32 billion in 11% senior notes.

The specialty chemicals business is seeing broad strength, with a number of companies like Chemtura (NAS: CHMT) and Cytec Industries reporting better-than-expected earnings. Huntsman (NYS: HUN) also reversed the trend it suffered earlier in the year by reporting strong revenue growth this month.

All 17 All-Star CAPS members weighing in on the chemical outfit believe it will go on to beat the market averages. Add LyondellBasell to your watchlist and let us know in the comments section below whether investors will enjoy the chemical reaction resulting from the special dividend.

No way to run a railroad
They're still working on the railroad, but just not as much at RailAmerica, which reported that the number of carloads fell 2.6% in October on a "same railroad" basis, following a 10.5% decline in September. The short-line rail operator hasn't reported a single month of rising carloads since March, when they rose 1%.

The areas where it had the largest growth of shipments last month were coal, waste and scrap materials, and metallic ores and metals. However, the coal shipments increased largely because a power plant had maintenance downtime in the year-ago period.

Maybe it has to do with Warren Buffett's bet on railroads, or because of the integral role they play in a recovering economy, but all 18 CAPS All-Stars rating RailAmerica believe it, like the little engine that could, will make it over this hump and spur further growth.

However, railroads face a looming strike deadline that could cripple the economy. With more than 90% of railroad workers belonging to a union, according to the American Association of Railroads, President Obama appointed a special task force to mediate the dispute. It recommended handing railroad union members an 18.6% hike over six years. The railroads had offered 17% over that time period while the unions wanted 19% over five years. Did the task force pretty much split the difference or hand the unions a golden spike?

Add the railroad operator to the Fool's free portfolio tracker and tell us on the RailAmerica CAPS page if you think this won't result in a runaway train of lowered expectations.

At the time thisarticle was published Fool contributorRich Dupreyholds no position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of RailAmerica and Domino's Pizza.Motley Fool newsletter serviceshave recommended buying shares of CEC Entertainment. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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