AIG: Strong Upside Potential This Year

| About: American International (AIG)

Quoting Warren Buffett, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well."

One stock that I suspect isn't terribly popular now is American International Group (NYSE:AIG). Bailouts, in general, are unpopular with the public. But AIG's $182 billion government bailout is particularly offensive to a large segment of the public. I am interested to learn if this disdain is evident in the investment community, how AIG matches-up against competitors and finally-- as Warren Buffett's quote suggests-- if AIG is a worthwhile investment.

Gauging the popularity of a stock is a difficult thing to do. I chose 3 factors that will serve as my guide to 'popularity': 3 month average volume, institutional ownership and analyst ratings. Believe me, I am well aware that this approach is less than perfect, but there is some support for my argument here. After analyzing AIG's fundamentals and comparing them to those of its competitors, I believe we can begin to make reasonable arguments. I have selected The Travelers Companies (NYSE:TRV) and Ace Limited (NYSE:ACE) in this match-up.

First, we'll look at the fundamentals of these three companies. AIG has a market cap of around $53 billion and trades at just over ten times earnings. The price to earnings growth ratio is 1.10. Price to book is a standout 0.51. Return on equity for the insurance giant is a respectable, if not ideal 14.89%. Quarterly year-over-year revenue and earnings growth are -20.10% and 77.10% respectively. The debt to equity and current ratios are 66.35 and 0.92 respectively. AIG pays no dividend.

Travelers has less than half the market cap of AIG at around $23 billion, and trades at about 17 times earnings. It also sports a higher price to earnings growth ratio than AIG at 1.84. Travelers' return on equity is substantially lower than AIG's, coming in at 5.71%. Quarterly year-over-year revenue and earnings growth for Travelers are -0.30% and -30.90% respectively. Travelers' debt to equity ratio is superior to AIG's at 26.99 but its current ratio is inferior at 0.40. Travelers pays a dividend yielding 2.90% against a payout ratio of 47%.

Perhaps most disturbing is the fact that insider Jay S. Benet has sold a significant amount of Travelers stock. He is the Vice Chairman and CFO of the company. I think most potential investors would regard this as a vote of 'no confidence', and coming from the CFO, it takes on increased significance. Three straight years of declining shareholder value and net income cast doubts on Travelers' ability / willingness to sustain the dividend at current levels, and most certainly precludes the possibility of an increase in the dividend payout.

Our second competitor, Ace, has a market cap of around $24 billion and trades at just above 15 times earnings. Ace's price to earnings growth ratio is more attractive than AIG's, at 0.95. Ace's price to book is 0.99 and its return on equity is 6.68%-- inferior to AIG but superior to Travelers. Ace's quarterly year-over-year revenue and earnings growth are 1.60% and -25.10% respectively.

Debt to equity and current ratios for Ace are 25.72 and 0.98 respectively. Ace offers the highest dividend yield of these 3 at 2.10%, supported buy a payout ratio of 22%. Fitch recently revised Ace's outlook to positive and acknowledged Ace's steady increase in shareholder value. I believe this makes Ace an attractive long term investment option.

Now that we have a grasp of each company's fundamentals, let's see if we can gauge the popularity of the stock. Three month average volume shakes out like this: AIG (7,256,000 shares), Travelers (3,028,150 shares) and Ace (1,785,470 shares). One could argue that of the 3, AIG is, in fact, the most popular-- but let's look at institutional ownership.

AIG stands at 17.20%, Travelers stands at 84.80% and Ace is at 1.30%. By this measure, Ace is the least popular equity among the three. Finally, we'll look at the average of the analysts' ratings as per Yahoo! Finance. AIG comes in at 2.6, Travelers at 2.4 and Ace at 2. The analysts put AIG in last place. This is where we turn to the fundamentals and determine if we concur with these analysts or not. In my opinion, these companies are basically on a par in terms of fundamentals . All this research doesn't reveal any definitive bias against AIG. Investors seem to be acting rationally and in line with the facts, and that's a good thing!

On Thursday, the Treasury sold off AIG shares at about $29 apiece, the same price as a previous offering last May and slightly above what Treasury officials consider to be the government's "break-even" price of around $29 per AIG share. The $6 billion sale cuts the government's stake in the New York-based insurer to 70% from 77%, and generated a $56 million profit for taxpayers (wink, wink, nudge, nudge). Read this article and see what I mean!

My take on AIG is a bit simplistic, but, I hope you'll agree that it is logical. AIG's price to book is 0.51. I don't believe it is at all unreasonable to argue that AIG's price to book will, in time, approach at least 1 (this is about where Travelers and Ace stand now), translating into a share price that is nearly twice what it is today. This argument doesn't even consider the probability of continued growth in book value. We should also remember that before the financial crisis, AIG traded at multiples of its book value. I believe AIG is well on the way to re-establishing its bona fides and will compete successfully in the market. For the investor willing to go long, AIG is a decent buy now with solid upside potential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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