Most, if not all, investors are familiar with and have used stock screens. They enable one to narrow a long list of stocks based on certain characteristics. Some of the most basic stock screens will look for companies with low P/E ratios or heavy cash flow generators. A stock screen is only limited by the criteria one wishes to apply.
I've come up with a stock screen, however, that I don't believe can be screened via a computer. It's a simple screen with two filters: securities that are worth at least twice what they are trading for and are owned by investors with market-beating track records.
I like this screen because it captures a lot of other filters implicitly. For example, if a stock is owned by a highly regarded investor, odds are good the company has a good business model or unique asset. Odds are the management team is capable, the company is financially sound and undervalued. Of course, even the best investors can be wrong, but good investors are good precisely because they don't make too many mistakes.
Going one layer further, I then seek out stocks that have a potential for being doubles or even triples.
So I call this screen the "Heads You Win Big, Tails You Lose Little" screen.
First up is online education company Rosetta Stone (RST), which currently trades for under $7 including $1 in net cash per share. Rosetta is owned by Roumell Asset Management and Osmium Partners, both of which think the company is worth between $13 and $17 a share to a private buyer or as a going concern. In fact, Osmium lays out its thesis in a press release for those who want a little more clarity.
Keryx Biopharmaceuticals (KERX) will certainly look more speculative. This biotech has a $600 million market cap, generates little current revenue and loses money each quarter -- your typical biotech. There's no debt and about $130 million in cash on the balance sheet. After trading as high as $19, shares now trade for $6. The company has an approved product on the market that just came out for chronic kidney disorder. The company expects to market that drug in Europe in the coming quarters. Over 20% of the company is owned by Seth Klarman's Baupost, which I estimate has a cost basis of over $12 in the stock. Not only that, but Baupost continues to add to the position. The catalyst is simply increased awareness and acceptance of the company's drug Auryxia. Analysts at Barron's recently reduced the price target from $26 to $22 per share.
These securities are not for the short-term investor or perhaps not even for a die-hard value investor. But nor are these the speculative gambles that perhaps many would deem them. More so, the upside potential is so high that a carefully constructed portfolio of these bets is likely to have an overall attractive return.