Here’s a bit of irony: American International Group (AIG), the gargantuan insurance company that decimated conservative investor portfolios less than five years ago, is now a favored stock among value investors. No kidding. Value-oriented funds are buying loads of this, and one can see the swelling enthusiasm in a stock chart.
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A.I.G. was the most popular purchase percentage-wise among major hedge funds last quarter, and the third-most popular as a pick. Among the biggest buyers were Whitney Tilson of T2 Partners Management, Bill Nygren of Oakmark Select and David Tepper of Appaloosa Management, according to datarama. About half of value investor Bruce Berkowitz’s Fairholme Fund is made up of A.I.G. now, although he shaved a bit last quarter.
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Industry analysts, too, are fans now. The shares have collected at least six new buy recommendations in the past three months, pushing its buy-to-hold ratio to nearly 2-to-1.
This newfound popularity comes just as the U.S. government takes its money out of A.I.G. Recall that A.I.G. nearly killed itself, and ultimately helped drain the U.S. Treasury, with a bunch of ridiculously risky investments in the early century. The government spent about $182 billion bailing it out for fear that the bankruptcy of the biggest and most entrenched public companies would set off bank failures throughout the country. In 2008, the government owned as much as 92% of A.I.G. On Tuesday, Uncle Sam launched a public offering to sell its remaining 16% stake for $32.50 a share.
In investment terms, Uncle Sam made out okay on the deal -- about $22.7 billion or a 12% return over the last three years. Recent investors have done very well in the new A.I.G., where asset sales have helped pay down debt and fund stock repurchases. Shares are up more than 50% in the past year.
Even with those gains, a lot of investors still like A.I.G.’s share price now. A.I.G. shares still trade below competitors on a price-to-book value comparison to Ace (ACE), Chubb (CB) and Travelers (TRV).
That valuation, investors believe, implies growth that’s not easily found in this sector. A.I.G. is still selling off non-traditional assets, like a big stake in its aircraft leasing company earlier this month. As the company once again solidifies into an old fashioned insurance business, bullish investors believe its valuation will rise to more normal industry levels. The cheaper valuation is mainly the result of A.I.G.’s lower return on equity; a deficiency management has vowed to correct by 2015. Also, with the Treasury out of the business, shareholders are beginning to bark for a dividend.
A.I.G.’s turnaround is pretty extraordinary considering the company had to be all but nationalized less than five years ago. Good enough, it appears, to forgive even an L-shaped stock chart.
Dee Gill, a contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine.
- Investment & Company Information