Michael Karsch’s Top Stock Picks Include AIG

Michael Karsch, manager of Karsch Capital Management, has quite the pedigree. After working at hedge fund Chieftain Capital– which in turn was after he had graduated from Harvard Business School- he served as an analyst at Soros Fund Management where he got to work with Soros himself as well as fellow billionaire Stanley Druckenmiller.

Michael Karsch

Compared to other investors, Karsch puts less emphasis on company specifics such as the valuation and recent financial performance in favor of industry trends. This often leads the fund to invest in broad investment themes, with multiple stocks in one industry or even multiple stocks in multiple industries which benefit from the same trend. Since the investment process begins with where the industry is going and then moves towards the company’s valuation, analysts often form multiple top-down possible outcomes; if the general finding is that the current stock price is below the company’s value in many of the likely scenarios, Karsch would consider the stock a buy.

Karsch’s 13F filing shows that the fund is a fairly active manager; of its ten largest single-stock holdings at the end of September, four were in stocks that it hadn’t owned at all three months earlier. So in this case it is particularly important for investors to check on the individual stocks, as they may not be at the top of Karsch’s portfolio anymore– or he may have doubled his stake, as he did with his top pick. See the full list of his stock picks and read on for what we think of Karsch’s five largest holdings:

The fund’s top pick was Tyco International Ltd. (NYSE:TYC), which was the second largest holding at the beginning of July before Karsch increased its stake further to 5.1 million shares. Following its spinout of some other businesses, Tyco should now be a more focused security and fire protection systems company. It currently trades at 14 times consensus earnings for the fiscal year ending in September 2014. Billionaire Ken Griffin’s Citadel Investment Group was also buying the stock in the third quarter (find more of Griffin’s stock picks).

Karsch owned 2.2 million shares of Express Scripts Holding Company (NASDAQ:ESRX), which was the most popular healthcare stock among hedge funds at the end of September (see the full top ten list). The stock is priced for growth at 33 times trailing earnings, though in the third quarter of 2012 net income was up 21% from a year earlier. The forward P/E multiple is only 13 and the five-year PEG ratio is 0.8, suggesting that Wall Street analysts are very bullish in the company’s prospects.

American International Group, Inc. (NYSE:AIG) was another top pick with the fund more than doubling its position in the insurer. Other hedge funds loved AIG as well, and it earned the #3 spot in our rankings of the most popular stocks among hedge funds. Research more stocks hedge funds love. A good deal of investor sentiment still runs against AIG, but it trades at only about half the book value of its equity.

Karsch moved heavily into QUALCOMM, Inc. (NASDAQ:QCOM), closing the quarter with 1.6 million shares in its portfolio. This is another stock, like Express Scripts, where the buy case depends on growth: the trailing P/E is a good-but-not-great 18 but earnings have been up and the PEG ratio comes out to 1. Billionaire Ken Fisher’s Fisher Asset Management was another major holder of the stock (check out Fisher’s favorite stocks).

$15 billion market cap machinery company Ingersoll-Rand PLC (NYSE:IR) was Karsch’s fifth largest single-stock holding. Trian Partners, which is managed by billionaire Nelson Peltz, owned over 13 million shares and this made Ingersoll-Rand his top stock pick (find more stocks Peltz likes). The stock carries trailing and forward P/Es of 15 and 14, respectively, and we’d note that while there was an abnormal increase in net income in the third quarter compared to the same period in 2011 revenue actually came in lower.