American International Group: Huge Upside ... Once The Government Leaves

| About: American International (AIG)
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There is a stigma attached when investors hear the words, American International Group (AIG). AIG is synonymous with the bailout and credit crisis. The company is one of the largest failures, with the U.S. Treasury having to inject liquidity and guarantees of $182.5 billion during the height of the 2008/2009 crisis. Now, as AIG has sold off subsidiaries and paid back lines of credit, the light at the end of the tunnel is starting to shine through.

On March 8th, 2012, the U.S. Treasury announced a $6B secondary of AIG stock. After the sale, the government owned roughly 1.25B shares of AIG, worth $37B and representing 69.5% ownership. Robert Benmosche, CEO of AIG, also realized shares of the company trade at a significant discount, and bought $3B of the secondary as a share buyback for AIG.

Shares of AIG are trading at a significant discount based on their book value of $55/share on Dec 31st, 2011 and over $57/share after the share buyback linked to the Treasury secondary on March 8th, 2012. With shares trading around $30, you might be running to put in an order to buy AIG right now. However, with the large government stake remaining, I would advise waiting at the moment if you aren't in the stock already.

The best way to take advantage of AIG is to be patient and wait for the government to announce another secondary offering in AIG, when shares sink below the offering price by more than $1. This will be the time to buy your shares. Currently, the government is in a 60 day lockup after the most recent secondary. This means we could expect to see another secondary as soon as mid-May.

With the government owning more than 69% of AIG, they don't care about making a profit on the whole stake, but rather liquidating to under 50% ownership. After that point, I believe that they will start worrying about getting better prices for the U.S. taxpayers.

As for AIG, I expect the company to continue to buyback more and more shares, reducing shares outstanding and increasing the book value into year-end 2012. With the current pro-forma book value above $57/share, we could see that value rise to near $65/share book value by the end of 2012.

After 2 or 3 more secondary offerings in AIG, I wouldn't be surprised to see the government decide to start selling stock in the same manner as they did in Citigroup (C), where they sold at 10% of the volume practically every day.

As I said prior, if you don't own the stock already I would not chase the stock higher. Wait for the next secondary and buy $1 below the pricing. You can also buy half of your intended position on weakness and chose to sell out of the money puts (if the stock goes below the strike price you are obligated to buy shares at that strike price) on the other half of your intended position, and collect premium as you wait. Right now someone can sell the Jan 2013 $30.00 puts for roughly $3.20. This allows an investor to collect $3.20 or 10% annual return in AIG if the shares hold above $30.00. If shares fall below $30, you would be put stock at $30, and your breakeven price after factoring in the premium would be $26.80.

There are many ways to take advantage of AIG at these levels. The stock is a steal at $30, and it's just a matter of time till the government exits its majority stake. The investment community will eventually come in and swoop up the shares of AIG taking it above $60/share.

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