Hidden Stocks for High Returns


Although some investors pile into the momentum stocks looking to ride the wave higher, others choose to buy into those overlooked by Wall Street and Main Street, preferring to find undervalued gems to invest in. The former flash and crash when the momentum goes cold; the latter have a better shot at delivering outsized gains over the long haul.

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


CAPS Rating(out of 5)

Number of Active Picks

EPS Growth Last Year

Estimated EPS Growth This Year

Inphi (NAS: IPHI)





Marathon Petroleum (NYS: MPC)





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.

Head in the clouds
With the rise of virtualization and the growth of cloud computing, memory density and server performance have become key issues for data centers. Bottlenecks develop as memory module capacity can't keep pace with demand from servers using more multi-core CPUs and become increasingly virtualized. That's where Inphi comes in. Its load-reduced, dual-inline memory modules -- LRDIMMs -- offer four times the memory capacity and nearly double the bandwidth, giving both capacity and speed a boost while using the same amount of space on the motherboard.

Inphi is the only manufacturer of LRDIMM buffer chipsets, which have found their way into servers from IBM (NYS: IBM) and Hewlett-Packard (NYS: HPQ) , but it's had patent problems with Netlist (which it lost) that has proved problematic for the chip developer.

It now has new management at the helm and recorded a sequential increase in revenue in the first quarter, albeit still being substantially below last year's effort, and is looking for another 5% to 10% sequential gain in the second.

The stock is down more than 50% over the past year because of its troubles, but with $120 million in cash and short-term investments, it's trading at just two times those balances, which analysts are finding attractive from a valuation standpoint. So does the CAPS community, apparently, as it has unanimous support from the two dozen or so members who've weighed in on this low-profile chipmaker.

Let me know in the comments section below or on the Inphi CAPS page if it can turn around from the setbacks it's suffered, and add the stock to the Fool's customized portfolio tracking service to receive updates on its efforts to introduce its LRDIMM chips into more servers.

Tastes great, less filling
Slicing up its business into narrower slivers is making Marathon Petroleum a more specialized operation, and though the refining industry operates on narrow margins, making the stock a dicey investment in the current environment, at less than six times earnings estimates it is a cheap stock. With a dividend of $1 a share that yields almost 3%, it's not a haphazard investment.

Spun off from Marathon Oil a year ago, the refiner is looking to capitalize on the renewed interest in pipelines by spinning off its own midstream assets. We've seen a lot of industry players looking to reap the rewards of value held in pipeline business, as Sunoco is being bought by Energy Transfer Partners for its East Coast network of transmission lines, Kinder Morgan (NYS: KMI) is buying El Paso, and ConocoPhillips spun off its midstream and chemical assets into Phillips 66. The refinery industry has seen profits squeezed as demand for gasoline and other petroleum products has declined, down more 10% over the past five years, according to the U.S. Energy Information Administration, as crude prices have risen.

Now that oil's price is retreating, refineries may see new life. Marathon has new capacity coming online this year, which, as pointed out by CAPS member cardiaccards, has been excluded from the market's downward valuation of the refiner's stock:

Well positioned company with new refining [assets] coming online in late 2012. I don't think the values of this new capacity and ability to process heavy Canadian Oil are priced in. In addition it has been down since a great earnings report.

It's still underfollowed on CAPS, but only one All-Star sees it underperforming the indexes. Add Marathon Petroleum to your Watchlist, and let us know in the comments section below whether you think there's a profitable future for a more narrowly defined company.

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.

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At the time thisarticle was published Fool contributor Rich Duprey holds no other position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of IBM and has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Originally published