James McDonald, Chief Investment Officer at Hunter Hall, likes to look past the small gains and target investments that could double. With three major clinical trials due between now and June, he thinks Sirtex is such an opportunity. “They have the potential to double, or even triple sales and in very short order double or triple the share price… even if they’re all unsuccessful, the sales won't fall much because these aren't regulatory trials.” Sirtex currently accounts for around 2% of liver cancer treatment and is generally used as the last line of defence. Success in the trials would allow the company to market the product more effectively, and allow oncologists to more effectively target patients with a higher chance of success. In the video below, he shares insights into how he identifies stocks with large potential upside.
- Screens for low price-to-NTA or free cashflow yield can generate ideas
- Most ideas come from years of meeting and watching companies
- Three major trials for Sirtex are reporting in coming months
- If results are successful, the stock price could double or triple in short order.
Q: How do you identify companies that could double?
We run a lot of screens on the market using data from Bloomberg and Reuters. We're screening for things like companies that are trading at a low multiple of their tangible assets, or free cashflow yields; that throws up ideas.
For me, the biggest source is that over my 20 years of investing, I've met thousands and thousands of companies and I keep watchlists of those companies and industries. For example, you do research on a couple of sectors that you end up knowing well, then when you see a company fall substantially on that watch list that's when you go, "Aha." That's when I'm going to start doing some more work.
So, that's how we approach idea generation. It might sound like a scatter gun approach, but you build up niches of knowledge in certain sectors, and you mine that knowledge base.
Q: Can you provide an example of a stock that could double?
Sirtex has three major phase three clinical studies that have been going on for more than ten years now, and it's got about 2% of the liver cancer market. All three phrase three studies will report by the first week of June. They have the potential to double, or even triple sales and in very short order double or triple the share price.
The company says even if they’re all unsuccessful the sales won't fall much because these aren't regulatory trials. The product is approved and selling the radioactive beads to treat liver cancer around the world. This is really marketing data that the company can then mine the data to find sub-groups of people who have responded well and then go to the liver cancer specialists and sell the treatment more effectively.
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