Karsch Capital Management, is an alternative asset manager, founded by Michael Karsch. The firm’s 2.3 billion in assets is mostly invested in the fund’s flagship offshore hedge fund. People with direct knowledge of the matter, have informed us that a new UTIC willl be formed, which will start with $230 million assets. The firm closed a credit fund, despite the good returns, due to the difficulty in raising assets. The credit fund was launched in Q2 2010, with a focus on senior distressed bank debt.
The firm’s flagship hedge fund has returned 6.4% year net of fees. Since inception in 2006, the fund’s return of 130% has beaten the S&P 500’s return of 22%.
The fund is short J.C. Penney Company, Inc. (NYSE:JCP), Eli Lilly & Co. (NYSE:LLY), and Ancestry.com Inc (NASDAQ:ACOM). No reason was provided for the rationale on the short side. It is interesting that the managers are bullish on Burger King Holdings, Inc. (NYSE:BKC). Bill ackman owns 10% of BKC. Ackman additionally is a large shareholder of JC Penny. Likely the hedge fund thinks highly of Ackman, but is skeptical of turning around JC Penny. In general, retail turnarounds like the one Ackman are attempting with JCP are very difficult.
Karsch likes companies which are returning capital to shareholders, primary through share repurchases. The firm mentions Eddie Lampert’s ESL Investments investment in AutoZone, Inc. (NYSE:AZO), as an example of activism encouraging companies to buyback shares. AutoZone has reduced outstanding shares by over 70% since Lampert’s investment.
The firm is bullish SLM Corp (NASDAQ:SLM), which is in the student loan business. The firm has a return on equity of over 20%, and 90% of loans originations in 2012 have a co-signer. This has mitigates default risk. Investors are concerned over regulatory risk regarding student loans, but SLM could provide credit for home equity lines, or other services, which should keep return on equity over 20%. SLM plans to buyback approximately 8% of outstanding shares.
American International Group, Inc. (NYSE:AIG), a name which spooks many investors, trades at 0.4 times book value. AIG is in the process of monetizing its Maiden Lane loans. The company owns an 18% stake in AIA. Despite 60% of shares outstanding being owned by the Government, AIG could buy out a large percentage of the stake through asset sales.
Karch also likes Express Scripts Holding Company (NASDAQ:ESRX) due to $90 billion of brand name drugs becoming generic drugs over the next four years. The merger with Medco Health Solutions Inc. should add between $1-$2Billion of cost synergies. The company could double its EBIT over the next four to five years and double its EBIT margins.
CVS Caremark Corporation (NYSE:CVS) will benefit from the Express Scripts merger, as a result of industry consolidation. Express Scripts’ dispute with Walgreen Company (NYSE:WAG) will also help CVS gain customers. The company has raised guidance and should have strong sales this quarter.
( (Full disclosure: The author of this article is long J.C. Penney Company, Inc. (JCP), no other positions in any companies mentioned))