Is American International Group Inc (AIG) a Good Stock to Buy?

During the fourth quarter of 2012, American International Group Inc (NYSE:AIG) replaced Apple as the most popular stock among hedge funds according to our database of 13F filings (find more stocks hedge funds loved). 142 of the filers which we track were long the bailed-out insurer going into 2013. Billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital initiated a position of almost 7 million shares between October and December (see Mandel’s stock picks).  Third Point, managed by billionaire Dan Loeb, cut its stake by 21% but still owned over 18 million shares; this made AIG the fund’s second largest holding by market value (check out Loeb’s favorite stocks).

LONE PINE CAPITAL

The sell-side is also somewhat optimistic on AIG. Consensus earnings estimates for 2013 imply a current-year earnings multiple of 12, and looking out to 2014 we get a forward P/E of 10. At that valuation compared to current financial performance, the company needs very little growth on the bottom line in order to be undervalued. In the fourth quarter of 2012, revenue grew 9% and so we think that stronger business over the next few years is quite possible. Currently, American International Group Inc (NYSE:AIG) also trades at a steep discount to the book value of its equity with a P/B ratio of 0.6. We wouldn’t say that the stock should be trading at book value- the value of the assets isn’t entirely reliable, and it seems quite aggressive to suggest that the “bailout discount” will evaporate entirely within the short to medium term.

Still, the fact is that AIG’s popularity among hedge funds is in stark contrast to how many large institutional investors such as mutual funds feel about the stock. Looking at mutual funds specifically, only two own more than 1% of the total shares outstanding and one of those is the Vanguard Total Stock Market Index Fund. Two large property and casualty insurance companies are ACE Limited (NYSE:ACE) and Travelers Companies Inc (NYSE:TRV); nine and six mutual funds report owning 1% or more of the outstanding shares, respectively (including the Vanguard Total Market fund in each case). True, American International Group Inc (NYSE:AIG) is larger in terms of market cap, but it certainly appears that institutional investors have thus far been hesitant to buy in. Over time- particularly given the presence of top hedge fund managers- we expect these big players to at least modestly increase their holdings of AIG.

Ace and Travelers are actually valued at premiums to book value, meaning that the market is heavily discounting AIG’s assets not only relative to book but also relative to how it values the assets of AIG’s peers. The gap is quite narrow as far as the forward P/E goes, however, with each carrying a forward P/E of 11. We’d also note that revenue growth rates in Q4 2012 compared to the fourth quarter of 2011 were considerably lower at Ace and Travelers than at AIG.

We can also compare American International Group Inc (NYSE:AIG) to The Chubb Corporation (NYSE:CB) and toHartford Financial Services Group Inc (NYSE:HIG). Chubb has a similar status to Ace and Travelers: trading well above the book value of its equity (in fact, the P/B ratio here is 1.5). With trailing and forward P/Es of 16 and 13, respectively, and not particularly strong recent financial performance, we would avoid the stock. Hartford actually does look cheap, and might make for a good substitute for AIG if investors just don’t want to buy that stock. The value metrics are very attractive, with a similar P/B ratio to AIG’s and with analyst expectations implying a forward P/E of 8. We’d be interested in learning more about the company.

In general, American International Group Inc (NYSE:AIG) seems to represent a better value than its peers- particularly if we compare its P/B ratio to those of some other insurers- and over the medium term we’d expect that institutional investors will come around to buying shares even after the company’s poor performance during the financial crisis. Hartford looks interesting as well.

Disclosure: I own no shares of any stocks mentioned in this article.

Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

The 10 Most Peaceful Countries in the World

5 Big Reasons Communism Failed

The 15 Most Famous Carl Icahn Quotes

10 Scary Animals that are Actually Harmless

The 8 Most Famous Singer-Actors in Entertainment

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!