Is It Time To Buy Government 'Bailed Out' Stocks?

Includes: AIG, C, GM
by: George Kesarios

The U.S. was able to handle the AIG (NYSE:AIG) and General Motors (NYSE:GM) crisis through the use of market dynamics. That is, shareholders were written off, debt was written down and the companies were recapitalized in order for them to continue as going concerns. In both cases, the debt load was simply too much for both companies to handle.

While I do not believe countries should be shareholders, once in a while action is warranted by the state to keep large businesses afloat, assuming of course that after restructuring they can survive on their own. This of course for the benefit of the economy and the taxpayers, not the shareholders.

Please note that in the case of GM, the U.S. government did not bail it out, it took it over. It acted as it were the sole creditor and simply took over the assets, in exchange for the fact that the company could not fulfill its obligations to third parties. And because GM was so large and so important to the U.S. economy, the government took it over to restructure it.

Bailout (in my book) means that the shareholders have benefited from the government actions. I don't see any AIG or GM shareholders saved, I see them obliterated. As such, I disagree with the term bailout and prefer the term restructure.

Over the past four years or so, the FDIC has taken possession of about two banks a week. Due to that, the FDIC is the institution that guarantees deposits, it is the one that has to pay depositors in case a bank goes under. As a result of going under (usually for not meeting capital requirements) bank shareholders and creditors pay a price. The shareholders get wiped out because they did a lousy job, and bondholders also take a hit, for providing capital to a company that did a lousy job.

In the end, both shareholders and a certain bondholders go to investment heaven (or hell), because the FDIC has to resell any assets it can, to recoup all or a portion of the money it provided to guarantee deposits. There is absolutely no difference between what the FDIC does and what the federal government did in the case of AIG and GM. The only difference, is that in both cases, the Federal government made a profit. One can probably make a point that Citigroup (NYSE:C) shareholders were saved, but then again, if one looks at the adjusted Citigroup chart over the last 10 years, I don't think they feel saved.

What I want to say is that there are certain instances where the state has to do certain actions in order to avoid a systemic crisis. And I am really sick and tired of the no bailout crowd, who prefer to see financial chaos rather than an orderly restructuring (as the case was in both GM and AIG), by bending the rules once in a while.

So now that the U.S. government is selling both of these companies, should we be buying?

GM has a trailing PE of about 8 but according to most analysts, a forward PE of 5.8. There is no discount to book value, but if analysts are correct, then more than likely this stock will simply be too cheap next year to stay at these levels. Return on equity is a healthy 14.5% and about 3% of total stock is short, which under certain circumstance can provide for a rally, if the shorts cover. Overall, I like it.

As far as AIG goes, the best thing for shareholders is that they are buying the stock at 50% of book value. That's always important in a financial stock. Also, AIG is a well-known international brand and if you want global diversification, this stock is a must for any portfolio. The current PE is about 3 but the forward PE is 9. That is probably the most negative factor.

However, there is another point I want to make, that from experience, I think is the most bullish factor for both stocks.

Whenever the market knows there is a big player that wants to sell a big block of stock, the market does not bid up the stock, preferring to wait it out, until such a time comes that the big player has no stock left.

Usually, after this big player is out, (and the stock is not expensive) there follows a big rally. This observation is not an axiom and is not a bedrock market rule, but it is something I have seen many times before. As such, and given the relative good valuations of both companies, chances are that after the U.S. government sells its last share, these two stocks should appreciate.

The U.S. government reduced its stake in AIG to 21.5%, selling in a secondary offering about $18 billion worth of stock and with a profit. It was the biggest sell-down of the government yet and it was the largest secondary offering in U.S. history. In my book, this offering was a success. Also in my book, if the government sold its entire position, the market would have absorbed it.

So hands up for both companies for different reasons. Overall, if you are a conservative investor, I think that both of these companies warrant consideration.

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.