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.


CAPS Rating(out of 5)

No. of Active Picks

EPS Growth Last Yr.

Est. EPS Growth This Yr.

GSI Technology (NAS: GSIT) ****8081%(72%)
Safeguard Scientifics (NYS: SFE) ****100(61%)320%

Source: Motley Fool CAPS

The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find two 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.

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.

Chipping away at the competition
Semiconductor manufacturer GSI Technology is under the gun from Cypress Semiconductor (NAS: CY) , which has sued it for patent infringement. This morning it upped the ante by expanding the complaint to include a proprietary product made by GSI for its largest customer. While it doesn't name the customer, GSI has separately identified Cisco (NAS: CSCO) as its biggest client, and it expects sales to the company known as "the backbone of the Internet" to grow by almost 23% this quarter.

GSI says Cypress has offered no evidence of any infringement, and a trial by the International Trade Commission is scheduled for March. In the meantime, Cypress is trying to pick off customers by reaching separate agreements with them and releasing them from the complaint. The joint venture by Nokia (NYS: NOK) and Siemens was one of those reaching such an agreement.

Since operating under this cloud of suspicion, GSI's stock has lost more than half its value, but the company has responded with its own lawsuit alleging a conspiracy to monopolize the SRAM market. This low-flying tech stock has still attracted the support of 93% of CAPS members, who rate it to outperform the broad indexes.

Let us know in the comments section below or on the GSI Technology CAPS page if you agree the case against it is without merit, then add it to My Watchlist to be notified of any developments as they occur.

Down, but not out
High-tech and life-science venture investor Safeguard Scientifics continues to fly under the radar of professional analysts and armchair investor types. While you probably haven't heard of most of its investments you've probably never heard of, career assist specialists Beyond.com has gained some prominence in the wake of the recession. Like CareerBuilder and Monster Worldwide (NYS: MWW) , it provides a means for jobseekers to post resumes and find job openings.

During the dot-com boom, Safeguard traded over $400 a share, so its current valuation is a bit more modest. But CAPS member mhonarvar thinks it offers up some comparatively attractive numbers and only one of the All-Stars weighing in on the VC firm thinks it won't go on to beat the street.

Being a venture capitalist is a risky business, and though tech and life sciences offer some interesting opportunities sometimes -- one of its recent investments, Crimson Informatics, helps you improve your driving skills by providing you with feedback on your driving habits -- but there's no assurance they'll catch on. 

Add Safeguard Scientifics to My Watchlist and let us know in the comments section below whether you think it will regain its former glory.

Keep a high profile
Although these promising stocks possess equally persuasive arguments for swearing them off, it highlights why you need to look beneath the headlines and press releases to get a fuller picture of where your money is going.

Looking where others aren't is how The Motley Fool uncovered two small-cap stocks with solid government deals that are ready  to deliver multibagger returns. Check out The Motley Fool's free report "Too Small to Fail: Two Small-Caps the Government Won't Let Go Broke." Get access to detailed analysis of these two companies -- it's completely free.

At the time this article was published Fool contributorRich Dupreyowns shares of Cisco Systems, but he holds no other position in any company mentioned.Click hereto see his holdings and a short bio. The Motley Fool owns shares of and has created a bull call spread position on Cisco.Motley Fool newsletter serviceshave recommended buying shares of Cypress Semiconductor and Cisco. 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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