Finding the Next Deep-Value Winner - TheStreet

Value investor Mohnish Pabrai had a huge success Monday with one of his holdings, Harvest Natural Resources (HNR) .

The Venezuelan oil company was up 37% on news that Venezuela would restructure HNR's in-country operations so that the Venezuelan government would be a majority owner. The market abhors uncertainty, and now that we know what will happen with HNR's oil properties in the country, the stock came out of its range and shot up.

I had been following the stock for a while, and I've had great success with other Mohnish Pabrai plays, but I could never quite get behind this one because of concerns about Venezuela. Pabrai, a noted deep-value investor in the Warren Buffett tradition (see my interview with him in

Trade Like Warren Buffett

) stuck to his guns and won big.

Every one of the companies in his portfolio seems to have two qualities: deep value (as measured by a low multiple over assets or earnings) and a slight taint of scandal or uncertainty.

For example, let's look at gambling software company

Cryptologic

( CRYP). The company has $102 million in cash, no debt and a $344 million market cap, which means almost a third of its market cap is in cash. Additionally, it trades at just 8 times EBITDA.

It's dirt cheap, but there is a lot of uncertainty about whether or not the U.S. will revisit whether to make online gambling legal in the U.S., which would be a big boon to companies such as Cryptologic and also

Optimal Group

( OPMR). The

Freakonomics Poker Portfolio

contains other stocks that would move positively if online poker is made legal in the U.S.

Another deep value play in Pabrai's portfolio is

FreightCar America

(RAIL) - Get Report

, which has $184 million in cash, no debt and a $620 million market cap. Recently, super hedge funds

SAC Capital

and

Citadel Capital

have been loading up on this stock.

HNR also appears on another interesting portfolio,

Top 10 'Magic Formula' stocks

. The Magic Formula refers to hedge fund manager Joel Greenblatt's technique for finding value plays, as described in his book

The Little Book That Beats the Market

. In it, he describes a technique for finding stocks that are good (as defined by high return on equity) and cheap (as defined by a low price/earnings ratio). This portfolio also includes

OmniVision Technologies

(OVTI)

and

True Religion Apparel

(TRLG)

.

For Pabrai's top positions, go to the

Mohnish Pabrai

portfolio on Stockpickr.

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At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is president of Stockpickr LLC, a wholly owned subsidiary of TheStreet.com and part of its network of Web properties, and a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

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TheStreet.com has a revenue-sharing relationship with Trader's Library under which it receives a portion of the revenue from purchases by customers directed there from TheStreet.com.