Let me begin by saying that as a self described short term trader, I have been enamored by American International Group (AIG) for quite some time as a buy and hold investment. The company as many are well aware, was at one point, one of the premier blue chip stocks commonly held without much thought. Then came the Financial Crisis that turned the world upside down. Decades of progress would be wiped out as credit froze, and some of the most storied companies in the world were brought to their knees in a series of events that still haunts investors, and prohibits many from trusting what has become known as "the system."
Several years later, the global economy can be described at best as frustrating. With national debt concerns in the U.S., as well as the time bomb many consider to be Europe, there is obvious reason to still be cautious. Unemployment is high, and the disparity between income is reaching historic levels. The fiscal cliff is looming, and oh yeah, Apple didn't sell 100 billion iPhone 5s yet. Meanwhile, the U.S. stock market is currently trading at levels not seen since 2007.
The tried and true investment philosophy of "buy low and sell high" is obviously something easier said than done. From my experience, the easiest way to do this is by starting with a fundamental macro assessment, and working backwards. Determining the overall direction of the market certainly makes life a lot easier for investors. Being right on the long side in an overall market moving higher is a lot easier than being long in a down market, and vice versa.
Fundamentally, it is hard to argue our global economy is anywhere near its peak. When weathering tough times, it is important not to discount the effects of having world leaders and people of significant power and influence trying to right the ship. In a vacuum, Greece, Ireland, and many other countries should have imploded a long time ago. Nevertheless they are all still standing. I am firmly of the belief that fundamentally, we are a lot closer to the bottom than we are to the top. This is a period in which we should definitely be cautious. We should also be fundamentally optimistic, and looking for ways to capitalize with favorable risk/reward.
This brings me to American International Group. AIG has become one of the more incredible turnaround stories in quite some time. While I will refrain from delving into the morality of government bailouts, the company has undoubtedly made significant progress over the past few years, and is now firmly on it's feet. They have paid back government loans, sold off non core assets, deleveraged the company from high risk operations, and most importantly, returned to profitability. Over the past year, the government has been able to reduce it's once 92% stake in the company to below 16%. The government is expected to be fully out of AIG by early 2013, rather than the initially expected time table of late 2014.
With everything mentioned above, AIG still trades at a substantial discount to tangible book value, currently said to be in the neighborhood of $65 a share. Why is this?
The primary reason it is believed AIG currently trades at such a discount to book is because of the government overhang. The U.S. government has stated that they are not a long term investor in AIG, but rather looking to exit at profit, as soon as possible. In a volatile market, their is a tendency to think short term. It is not surprising that investors would shy away from AIG knowing such substantial amounts of stock are sure to hit the market, provided the stock is trading above $29 a share.
A second reason many fear AIG is the stigma attached to the company as a result of their role in the Financial Crisis. There is a generally held misunderstanding, however, in the operations of AIG, and more significantly, the management team running the company, that firmly distinguishes pre-2009 AIG from the AIG of 2012 going forward.
The final reason is clearly more of a macro driven one. People are still scared of the stock market. With such significant losses of wealth in the financial crisis, and periodic news driven volatility over the past few years, people have simply become intolerant of risk.
Why It Simply Doesn't Matter
Value is value. A company in it simplest form, has an intrinsic value, which consists of its assets. Corporations as a whole are currently more profitable then they have ever been. They are hoarding substantial amounts of cash, and in terms of historic valuations, are relatively cheap. While value can change, and as Bruce Berkowitz famously stated, "cheap can get cheaper," I think it is important to realize that this intrinsic value can, and will act as a fundamental support for profitable, well run companies. This will not change simply because of a poor jobs report or new out of Europe. Dan Loeb, founder of Third Point LLC, recently broke down AIG's core businesses, and found there to be a conservative value of $49-$77 a share.
While many companies, particularly some of the financials, trade at a substantial discount to book value, AIG is different. This is not Bank of America (BAC) in which the balance sheet is diluted by a plethora of hard to value derivatives and pending lawsuits or unprofitable business. AIG has been greatly simplified thanks in large part to CEO Robert Benmosche. While I am sure there may be some margin for error, the difference, whatever one may find it to be, still places the company at a substantial discount to it's growing book value. The company has been buying back tremendous amounts of stock, while also placing great emphasis on hoarding cash and creating a fortress of a balance sheet. With the rumored IPO of ILFC, and the lockup expiration in regard to the companies stake in AIA, there is plenty more on the way.
For the past several years, the uncertainty of the business, and the stigma of failure surrounding AIG made it a hard sell to institutions. Even the most value oriented investors has a hard time putting this company in their portfolio. This has changed drastically over the past 18 months. Recent disclosures from many of the most respected and more importantly, successful fund managers have disclosed positions in AIG. Not just average positions, but in many cases, major ones. Bruce Berkowitz most notably has almost 40% of his fund invested in AIG. Leon Cooperman of Omega Advisors recently tripled his stake in the company. Julian Robertson recently disclosed a new stake in the company, as well as the aforementioned Dan Loeb, who's second largest holding is currently AIG.
Even more impressive is what transpired with the recent government offering. Over 500 million shares, or roughly 30% of the company were offered by the U.S. government. Generally with an offering of this size, which is very rare in and of itself, the share would have to be offered at a substantial discount to market value, and even then, upon the offering, the stock usually takes a hit simply because of the short term flood in supply. Their was such incredible demand that it was quickly oversubscribed. The offering ended up being priced barely 2% below the current market price, and by the end of the day, the stock was well into the green.
As referred to above, the government once owned the majority of AIG. However since successfully exiting the majority or their stake, and have more than enough institutional support to unload the remaining 16%, the overhang, and eventually the stigma should be gone, especially as AIG continues to progress as continues to publicly revamp their image. Once these short term detraction's from the shares price are lifted, the company should get a significant lift, and trade more in line with not only it's true value, but also at multiples consistent with other insurance companies.
Over the next 12-18 months, AIG has several major catalysts. The first and most important, being continued progress as displayed in their quarterly earnings growth. The full exit of the U.S. government will also be a positive contributor. CEO Robert Benmosche also recently stated they will look to reinstate a dividend, as early as 3rd quarter 2013. The stock upon reaching certain milestones, will also be eligible for ownership to a wider range of institutions of funds, and could even re-enter the Dow.
In my opinion, there are not very many risks when it comes to investing in AIG at current levels. The two main risks would be company's ability to continue to execute and general market risk. There is little reason to expect the company's execution to be affected. They have simplified their business model, have tremendous tax benefits, large amounts of cash, and should easily continue growing their earnings and book value as is, without even factoring in the business benefits of positive attention and a revamped public imagine that will undoubtedly occur as things progress.
Market risk is what it is. However, what history has told us is that even in some of the most violent corrections in history, profitable companies with great fundamentals usually rebound quickly and come back much faster, stronger, and better off than before the correction occurred. AIG's tremendous business growth, and dirt cheap valuation easily put it in great shape for the long haul, regardless of what the market decides to do.
AIG, at its current levels, is an investment that should be a no-brainer. It is currently cheap in terms of valuation by any metric used. There is hardly an analyst on Wall Street who would argue that the stock is expensive. The reasons it is at such a discount are rational, and make sense. These reasons are short term and should disappear over time. Even without growth, the stock is cheap; with the anticipated growth, it is an absolute steal. The company's true value, to a certain degree, should act as a support for the stock, independent of the overall market. Tack on one of the most bullish charts you will ever see, and it shouldn't be difficult to justify making a substantial investment in this company.
Disclosure: I am long AIG common stock, AIG Tarp Warrants, AVF, and AIG calls.