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Why AIG's Stock Price Is Not Catching Up To Book Value

Value Finder profile picture
Value Finder

We first purchased AIG for our fund in 2010 and started to pitch AIG (NYSE:AIG) alongside Goldman Sachs (GS), Bank of America (BAC) and Citigroup (C) as our favorite positions on our long side. Our main investment proposition has been, that investors will get most of AIG's mortgage portfolio for free and future growth at a discounted price. Since then, the government has exited its AIG investment, the company has been restructured operationally and financially, and it has re-branded its operations, and all the while the underlying insurance subsidiaries have been profitable.

We are significantly invested in AIG, both in terms of common stocks and warrants, as we have been since 2010, a short time after Berkowitz announced his bet on the insurance company. Since then we have gradually increased our holdings in AIG, mainly through long-dated warrants, as the stock declined to the mid-twenties. We also continue to believe in the resurgence of AIG going forward when the economy picks up steam and cyclical companies are sought after as institutional investors increase their risk appetite and retail investors start buying again.

We believe the reason for AIG's mispricing can be attributed to emotional factors rather than rational ones. In the case of AIG, we believe investors are overly exhibiting recency bias. This bias stipulates that investors assign too much value to past events that can readily be recalled and expect those events to continue. In essence, they extrapolate past negative performance into the future even though a company might have already reached a turning point. AIG and other financial stocks that got hit in the financial crisis do surely fall in this category. Every value investor would likely agree that a company with solid insurance subsidiaries and decent cash flow generation that quotes at a 35% discount to book value is an interesting long

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Value Finder profile picture
I have studied business administration and am a full time investor. My focus are undervalued stocks. I am a full time investor with 10 years experience in the capital markets.

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Comments (24)

YONSU profile picture
this post is a blog, has nothing to do with the article posted, How about
pushing your blog somewhere else michael.
Macro Economist profile picture
AIG is a good, safe play, but the problem is that there is too much political scrutiny on the assets side of the book. So recency bias does have some merit here since this company was a major clusterf&ck.

With no real ways of generating returns on the assets, book value increases will be depressed for a generation.

I doubt this company will outperform the insurance sector at large, which overall has some of the most attractive names in it.
Fast Track to Financial Independence profile picture
Do you think warrants lose much attractiveness if the holder cannot exercise but only buy/sell? My intermediary refuses to exercise...
Matthew Mazurczak profile picture
no because of time to expiration, I would switch brokers if you plan on investing in them.
Matthew Mazurczak profile picture
I have 12% of porfolio in warrants and plan to add as much as possible until the div adjustments kick in
campito profile picture
Try marketwatch or bigcharts.com ticker AIG.WS
Thanks for the insights, although a 30% allocation to any single corp entails significantly greater risk than Warren Buffet would find prudent. And why are several large hedge funds unloading some of their AIG holdings, if it were a sure bet. Could it be because of rebalancing/diversific... considerations or expectations for greater profit growth elsewhere? I have about 8% in AIG, mostly the warrants, and 50% of that just on account of share appreciation.

BTW, could somebody provide a link to charts displaying AIG-WT longer term than the Yahoo! Finance 5-day max?
Matthew Mazurczak profile picture
Agree with article. AIG still needs to shake off its bad reputation as most investors stilf fall back on that. The warrants are not a risky investment but the most safe investment in AIG. They are arlready above the strike price with 7.5 years to go and multiple adjustments. The ILFC sale if it goes through as IPO will also likely benefit warrant holders with another adjustment. Worst case AIG gets 4.5 BB to use for buybacks or increased div.

We will very likely see a .30-.50 quarterly div in the next 2-3 years
Value Finder profile picture
I am a big believer in the AIG warrants. They might not be risky for a long-term investor who intends to hold them for 5 years plus. However, returns are leveraged and investors pay a premium for the warrant: Strike price: $45, stock price $48 but warrant price $20.
Matthew Mazurczak profile picture
True but using your target price AIG will have made up for that by end of next year with 6 years to go. :)
Value Finder profile picture
That's why we are buying, and adding. Cheers.
YONSU profile picture
Ben M said on CNBC that hedge funds are selling and mutual funds are buying that in itself slows the upside. Hedge funds have sold approximately 50% of their holding since the first of the year.
Nice article, thanks.
Alex123456789 profile picture
AIG remains the "king of the hedge fund castle" writes ValueWalk, as Goldman's latest Hedge Fund Monitor shows 69 funds have the stock in their top 10 holdings as of June 30, ahead of #2 Google (GOOG) at 65 and #3 Apple (AAPL) at 50. The percent of equity cap owned by hedge funds is 14% for AIG, as opposed to negligible amounts for both Google and Apple.
Alex123456789 profile picture
who's Ben M anyway ? and what does he know about hedge funds activities ?
Doyle3000 profile picture
Agree with your article and quite frankly wished you hadn't published this. But share and share alike at SA.

I would've preferred they repurchased shares vs. issuing a dividend but the dividend does bring in different buyers.

I bought $30 LEAPS Jan 15 a while ago and regret not really loading up on them. Could've been game changing for me.

Selling PUTS as we go and am long in all the kids' accounts. I wish all my stocks acted like AIG.
Not too late to buy those LEAPS, imho
Value Finder profile picture
Right. We used every major pullpack over the last 3 years to increase our holdings. Our warrant position alone sits at about 30% of portfolio value. And rising.
Value Finder profile picture
The price target applies for the end of 2014. Even with a price appreciation of 60%, which could occur rather quickly, the market cap would just equal its book value. I do believe that the investments that AIG carries on its balance sheet will be worth more than that in a few years time. Plus, I believe the book value is waterproof, even big cats shouldn't affect book value growth much. The earnings multiple will also likely expand until 2014.
campito profile picture
@Value Finder

Great article. I agree with your rational and I initiated my position in the stock and then moved to the warrants.

However, recently I started to ask myself that if the thesis of BV is not a little bit rosy. In the last Q we saw a flavour of the impact of rising interest rate in the BV (including AOCI). Question is what sort of impact are you foreseeing with interest rates in a more normal level? Wouldn´t this be a drag to BV growth?

Again great article

Price expectations. You said 75 by 2014. Did you mean by the end of 2014? I don't think it is moving 60% in 5 months, but 17 months it might just do that and would still be a delicious annual return of close to 40%.
bobdavis4 profile picture
The Hartford HIG is the most undervalued stock compared to book price in the insurance sector
JD in NJ profile picture
I've been in AIG for a bit under a year, have seen quite decent growth, and would have no problem at all with the stock remaining underpriced for a while longer. That just gives me a chance to accumulate more.
Good article, agree with your views. The smart money is already committed and sitting, has been for a while, and now they're waiting for other investors (institutions, public) to come along and pay the higher prices. Could be a gradual process. The catalyst will likely be a return to dividends of normal size - perhaps next year. Nothing reassures the public and institutions better than dividends
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