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 outsize returns.
The Motley Fool CAPS community knows a bargain when it sees one. Below, you'll find two under-the-radar stocks brimming with promise. These companies have garnered 100 or fewer active recommendations on CAPS, though the community thinks they still have outsize potential.
CAPS Rating(out of 5)
No. of Active Picks
EPS Growth Last Yr.
Est. EPS Growth This Yr.
Key Tronic (NAS: KTCC)
Lear (NYS: LEA)
Source: Motley Fool CAPS.
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.
Typing up success
Although electronics manufacturing services specialist Key Tronic has tried to diversify its customer base -- its top five clients have historically included International Game Technology (NYS: IGT) and Lexmark -- its revenue sources have only gotten more concentrated. Two years ago, the top five accounted for 57% of total revenues; today, it's 72%.
Such concentration always creates risk, since if IGT or Lexmark cut back on purchases, it would have a significant impact on Key Tronic's results. But Key Tronic has also made itself more invaluable to its major customers by diversifying its product line. New programs including irrigation equipment, gaming devices, electric transportation, and military equipment helped revenues grow 38% last quarter, generating an 83% increase in profits.
Faced with rising productions costs in China, as many manufacturing businesses have recently experienced, Key Tronic expanded its manufacturing facility in Mexico. It now has a total of 500,000 square feet there compared to 150,000 square feet in Shanghai.
It was the recognition of China's rising costs that attracted CAPS member Ridefast last year. This company that has no Wall Street following has a unanimous positive assessment from the handful of CAPS All-Stars weighing in as well.
Let us know in the comments section below or on the Key Tronic CAPS page whether you agree it can cobble together additional growth, then add it to your Watchlist to see if it short-circuits.
It's probably not that investors haven't heard of auto parts supplier Lear, but that they've forgotten it after it sought bankruptcy protection. Out of sight, out of mind. So when the company emerged on the radar again last year, it took some time for investors to notice it was back on the scene.
The recovery of global auto markets is lifting Lear's profile, though. Ford (NYS: F) , General Motors, and BMW are its three largest customers, though it supplies parts to most major manufacturers, including Chrysler, Hyundai, and Tata Motors' Jaguar Land Rover. It was able to beat analyst expectations on revenues and earnings last quarter, though profits fell year over year.
Part of that was the result of tighter margins in its seating segment, which will continue to be weak in 2012. That could make the year tough, since the segment contributes more than three-quarters of Lear's revenues. But with Johnson Controls, Delphi Automotive, and others crowding in, it's a competitive segment.
All but two of the CAPS members rating Lear believe it will outperform the market indexes, so add Lear to your Watchlist and let us know in the comments section below whether it will drive off to higher returns.
Keep a high profile
Although there are equally persuasive arguments for swearing off these promising stocks, this only 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: 2 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 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 Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Ford, and BMW, as well as creating a synthetic long position in Ford. 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.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.