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Osterweis Capital’s Top Stock Picks

John Osterweis graduated from Bowdoin College with a B.A. in Philosophy, and then with an M.B.A. in Finance from Stanford University in 1969. After graduating from business school, John served as a senior analyst concentrating on forest products and the paper industry for several regional brokerage firms and later for E.F. Hutton & Company, Inc.

After fourteen years as a sell-side analyst, John founded Osterweis Capital Management in 1983 to run high net worth, endowment and foundation money. Osterweis capital has grown its AUM to $5 billion as of 2Q 2012. The company provides investment management services via products including managed portfolios and three mutual funds.

Chuck Royce

Osterweis’s top holdings according to its second quarter 13F filing was filled with interesting picks. We found some of the picks puzzling, while others may well be able to carry their portfolio.

Alleghany Corporation (NYSE:Y), a reinsurance company, was previously Osterweis’s fifth largest holding as of 1Q and during 2Q moved up to its top position. The company is up 24% year to date and closed its acquisition of Transatlantic Holdings Inc. at the end of the first quarter. The acquisition should enhance Alleghany’s distribution potential and diversify underwriting activities, which could be the reason that perhaps Osterweis put Alleghany as its top holding.

Osterweis has fellow investor Chuck Royce of Royce & Associates invested in Alleghany. Royce is the firm with the top ownership of Alleghany, of those we track. Alleghany announced 2Q earnings results of $1.1 billion in net premium earned and $6.45 EPS versus the same quarter last year of $184 million net premium and $1.68 EPS. The company currently trades at a trailing P/E of 6 and a forward P/E of 15 and will have a tough time living up to expectations, as next quarter’s EPS is estimated to be up 183%, while full-year EPS is forecasted for a 308% gain.

Cinemark Holdings, Inc. (NYSE:CNK), the movie theatre company, reported 2Q earnings 20% above estimates and is expected to grow next quarter earnings by 40% on a year over year basis. Cinemark is up about 25% year to date on strong performance and earnings beats and still has solid prospects going forward. Cinemark trades at a trailing P/E of 17 and a forward of 13, which puts the company’s PEG at 1.2.

Osterweis owns the most Cinemark shares of any of the funds we track, but Jim Simons of Renaissance Technologies is also in Cinemark for 2 million shares.

Osterweis has 3.9% of their 2Q 13F portfolio invested in Crown Holdings, Inc. (NYSE:CCK), the pay television network operator. Crown has seen a run up in its shares of 37% year to date and is expected to grow 3Q earnings 27% from the same quarter last year. The company has managed to marginally beat or meet estimates each of the last four quarters, meeting 2Q EPS estimates of $0.84 last quarter. The company is trading at a 17 trailing P/E, but at an 11 forward P/E and a PEG ratio of 1.24.

Having a relatively small market cap, Crown has not attracted very much fund interest, although John Shapiro of Chieftain Capital had over 10% of his 13F portfolio invested in Crown as of the second quarter.

American Water Works Co., Inc. (NYSE:AWK) is a water and waste-water utility company. For the second quarter, American posted EPS of $0.66 versus $0.49 estimates. The company recently increased full year 2012 guidance in the range of $2.12 to $2.22, versus consensus at the time of $1.96. Next quarter estimates are now expected to be 24% greater than the same quarter last year. The company trades at a trailing P/E of 20 and a forward P/E of 17.

Osterweis has some impressive company as investors in American Water. Jim Simons, D.E. Shaw and Israel Englander of Millennium Management all upped their ownership in 2Q. Simons upped his stake by 147%, D.E Shaw by 68% and Englander by 172%

Kinder Morgan Inc. (NYSE:KMI) is an owner and manager of energy transportation and storage assets. The company pays a solid dividend that yields 3.9%. Following the acquisition of El Paso Corporation, Kinder saw a run up in it stock, but has cooled off since then, now only up 11% year to date. The company trades at a trailing P/E of 283 due to two recent quarterly misses. 1Q earnings missed by 90% and 2Q earnings missed by 158%. However, the company trades at a forward P/E of 27 and earnings are estimated to increase 63% next year.

Notably, Stephen Mandel of Lone Pine Capital increased his 1Q Kinder stake by 130% in the second quarter. However, the insider sales have been robust of late for Kinder. Osterweis has made investments in some lesser-known companies that can prove to be big paydays or big losses, but we believe that Kinder or American may be the safer ones.

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