Finding the next Bear before it blows up

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NEW YORK (CNNMoney.com) -- For Bear Stearns investors, last week's news that JPMorgan Chase was boosting its "takeunder" bid from $2 to $10 a share came as little consolation.

Bear Stearns was trading at $30 a share before JPMorgan Chase (JPM, Fortune 500) announced its first bid. And a year ago at this time, the stock was trading around $150.

But there's at least one fund manager who spotted Bear's problems much earlier than the rest of the street - and saved his clients a bundle of money.

"We owned some brokers last year but got out of them early. We sold Bear Stearns at around $120," said Bob Auer, manager of the Auer Growth fund.

Auer has a basic strategy for buying and selling stocks. His firm only buys companies that have reported annual earnings growth of at least 25% and sales growth of 20% in its latest quarter, and trade at what Auer refers to as the "ridiculous" low price of 12 times earnings or less.

Auer and his team of analysts have a couple of other criteria they use, the proverbial "secret sauce," in their screening process. And Auer buys all the stocks that meet this criteria.

So when does he sell? Auer dumps a stock as soon as it falls short of any of the screening metrics or if it doubles. Whichever comes first.

In the case of Bear Stearns (BSC, Fortune 500), he got out once sales and earnings growth started to slow last year as the subprime meltdown and credit crisis was beginning to take hold on Wall Street.

Auer doesn't concern himself with expectations. He cares only about absolute performance, not relative performance. So he's not going to buy a stock that gets rewarded simply for meeting conservative earnings targets. And he's not going to sell a stock if it misses lofty expectations but is still growing rapidly.

"The very worst stock in our portfolio, ones that barely make it in, have 25% earnings growth and a P/E of 12," he said. With this in mind, what does Auer like now? He's bought an interesting mix of stocks lately, mainly smaller companies that fly under the radar on Wall Street.

One of his favorites is actually a bank, but not one that has been hit by the subprime crisis. Oriental Financial (OFG), a bank holding company in Puerto Rico with conservative lending practices, recently reported that interest income (profits from loans and investments) rose 40% in the fourth quarter.

Some other lesser-known firms that Auer believes could double are Almost Family (AFAM), a company that provides home nursing services to the elderly and is benefiting from increased Medicare spending, and Cal-Maine (CALM), an egg producer that reported Tuesday that sales in its latest quarter surged nearly 60%.

And Auer's approach often allows him to buy formerly hot momentum stocks that get punished for missing the Street's sometimes unreasonable expectations.

A perfect example is the shoe retailer Crocs (CROX), which has plunged since November after the company issued sales and profit guidance that were below estimates. The stock traded as high as $75 last year. Auer bought it at $20. It's slipped a bit more since then though, and now trades at around $16.

But with the company expected to report sales growth of nearly 60% this quarter and profit growth of more than 45%, he's confident Crocs will bounce back.

After all, with the stock now trading for just 6 times 2008 earnings estimates, it's hard to claim anymore that Crocs is a fad stock trading at a bubble price. Plus, he's not going to get greedy. If Crocs gets back to $40, he's not going to hold on, hoping that it will hit $75 again.

"We only care about growth and value. The rest takes care of itself," Auer said.

That's a sane approach in these volatile times. Any strategy that can help investors find some bargain gems, while also avoiding pitfalls like Bear Stearns, is a good one to pay attention to.

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