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Top Five Picks Of Whitney Tilson’s Investor Letter: American International Group, Inc. (AIG) and More

Tilson touted Howard Hughes at this year’s Value Investing Congress, noting that Howard Hughes is a good inflation hedge. However, that’s not the only reason to invest; the company owns a number of key master planned communities and development opportunities that are producing little to no cash, which makes the properties inherently difficult to value. As a result, Tilson believes the real estate is being undervalued. Tilson states that the intrinsic value could be upwards of $125 per share, versus its current trading price just below $80.

The fourth largest pick of Tilson’s is Citigroup Inc. (NYSE:C). Citi posted a disappointing 2012 fourth quarter, but the stock has held up relatively well, and is up 10% year to date. Earnings came in at $0.69 per share, well below consensus of $0.87, but earnings were still up 68% from the same quarter last year. For the quarter, there was also notable improvement in the bank’s capital ratios; its Basel III Tier 1 Common Ratio was 8.7%, up from 8.6% in the prior quarter, and its Tier 1 Capital Ratio was 14.1%, up from 13.9% in the prior quarter.

Despite its improving capital structure, the bank still trades in the mid-range of its 5-year price to book of 0.6x. The major bank also trades below major peers on a price to cash flow basis, trading at 8.4x, compared to Well Fargo’s 9.4x, Bank of America’s 30.2x and U.S. Bancorp’s 10.8x. Tilson notes that Citi is still below its tangible book value of $51.19, which is the low end of his range of intrinsic value. I have previously covered Citi and cited it as a solid investment (read more here).

Goldman Sachs Group, Inc. (NYSE:GS) is Tilson’s fifth largest pick. Goldman has been working on establishing a strong capital position, but Tilson acknowledges that Goldman has seen much the same pressures as Citi and AIG due to the financial crisis. The investment bank did, however, recently report earnings results with revenues up over 50% and earnings per share more than tripling from the same period last year.

The bank is also showing positive strides in returning capital to shareholder, by announcing dividend hikes of 31% and 8.7%, respectively in April and October of 2012. Tilson believes that the bank should be able to “consistently earn at least mid-teens ROE, in which case it’s worth a substantial 30% to 50% premium to tangible book value.”

Don’t be fooled. Tilson remained heavily invested in financials, with four of his top five picks being exposed to the insurance, banking and investment industries. I am a fan of Berkshire given its inherent diversity; AIG given its turnaround strategy and relative cheapness; Citi, which is one of the top ‘big’ banks and is still cheap; Howard Hughes given its tough to value properties that still might be undervalued by the market; and Goldman, thanks to its international presence and leading market share.

The article Top Five Picks Of Whitney Tilson’s Investor Letter originally appeared on and is written by Marshall Hargrave.

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