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).
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.
