The Penthouse Of The Billionaire Hedge Fund Hotel

| About: American International (AIG)

With the most recent 13F filings, the one name that keeps popping up in almost every big name hedge fund manager's portfolio is American International Group (NYSE:AIG). A total of 79 hedge funds have AIG in their top 10 holdings. It is estimated that 17% of all AIG shares are owned by hedge funds. The biggest holder of AIG stock among the hedge funds is Bruce Berkowitz and his Fairholme Funds. Together, they own 85.9 million shares, or a 5.82% stake in the company worth $3.3 billion. Other big names in AIG stock include billionaires George Soros, Seth Klarman, John Griffin, Dan Loeb, and David Tepper.

Cheap valuation

When hedge fund managers are asked about their holdings in AIG, all of them cite the company's low valuation. The two biggest proponents of value investing among the group are Bruce Berkowitz and Seth Klarman. Seth Klarman just increased his stake in AIG in the first quarter by 60% at prices between $40 and $45. Berkowitz was one of the original hedge fund managers that invested in AIG after the financial crisis. He has publicly stated that the value of his stake will quadruple over the next five to seven years.

In looking at AIG, we see that it has a current market cap of $65.42 billion. The stock trades at a forward P/E of 10.63 and has a PEG ratio of 0.94. The company's current operating margin is 16.2%. Over the past year, the stock is up over 51%, so it's been a great performer for the funds that have been long the stock.

The most common item that the value investors cite for owning AIG stock is that the stock is cheap compared to its book value. Current book value per share is $67.41 and the stock is currently trading just below $45. This statistic also explains why so many analysts love the stock. Of the analysts that follow the stock, 12 have it rated as a "Strong Buy" or "Buy". The rest of the analysts have it rated as a "Hold".

Freed from the U.S. Government

Last year a big overhang on the stock was the U.S. Government's large position in AIG stock. That all ended last December when the U.S. Treasury sold its last remaining stake at $32.50. By removing a large seller from the market, the stock was free to continue its upward trajectory.

After the U.S. Treasury sold its last remaining shares, Bernstein Research issued a report and said that AIG is a "once-in-a-generation opportunity". Bernstein cited MetLife (NYSE:MET) as the clearest example to AIG. MetLife was a mutual insurer that converted to a public company. After MetLife was demutualized, the company dramatically outperformed expectations. The CEO at MetLife at the time was Robert Benmosche and he's now the current CEO of AIG. Hedge funds are banking on Benmosche's track record.

Outlook For AIG

Under current CEO Robert Benmosche, AIG has been able to achieve a semblance of its once former self. The company sold off its Asian life insurance business and is now focused on its property casualty, life and mortgage insurance businesses. AIG is now a much-leaner organization with everything in place to deliver results to the bottom line. In all respects, Benmosche has been able to engineer one of the greatest turnarounds in American business history.

AIG will greatly benefit over the coming quarters by not having to pay income taxes. The company has huge net operating loss carry-forwards. Any pretax earnings will go straight to the bottom line.

Shareholders of AIG can also look forward to possible stock buybacks or dividends. Both of which, however, would require approval from the Federal Reserve. AIG has been working to pay down debt and boost its credit ratings with the rating agencies. I don't see a dividend or buyback in the immediate term, but is likely within the next two years.


In looking at 2 of AIG's competitors - MetLife and Prudential Financial (NYSE:PRU), we see the following:

  AIG MetLife Prudential
Market cap $65.42B $46.28B $31.43B
Revenues $64.05B $70.26B $85.75B
EBITDA $15.65B $7.69B $2.10B
Net income $6.46B $2.30B $684M
Operating margin 16% 10% 2%

By looking at this table, we see that AIG has a far better operating margin and higher net income than either MetLife or Prudential on lower revenues. AIG also has much more robust hedge fund interest. Going into the second quarter there were a total of 146 hedge funds long the stock, with Bruce Berkowtiz's Fairholme holding the largest position in the stock, worth a $3.3 billion position and making up 42.4% of its 13F portfolio (see Fairholme's latest moves).

Meanwhile, MetLife had a total of 56 hedge funds long the stock. In looking at the hedgies owning the stock, Pzena Investment Management holds the biggest position, comprising 2.2% of its 13F portfolio (check out Pzena's portfolio). Meanwhile, Prudential has billionaire Ken Griffin as its top hedge fund owner (check out what Griffin has been up to).


A common worry among investors is about what happens when the hedge funds decide to head for the door on AIG, much like they did with Apple (NASDAQ:AAPL). I myself was worried about this fact when I started researching AIG. However, the loss carry-forwards are the company's prime asset. That along with the stewardship of Robert Benmosche support the bull's case to own AIG. As long as Benmosche is in charge and the company can earn money without paying taxes, the stock is heading higher. Look for the stock to continue higher as it chases its book value per share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.