Stock of the Day
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AIG (AIG)
Don't Bet the College Fund on AIG
One of the juicy stories during these lazy last few weeks of summer has been the transformation of (former) insurance giant AIG from the laughing stock of the financial world to the darling of the stock market. The stock went through an embarrassing 20 to 1 reverse split (to get it out of the penny stock neighborhood) in July and since then has more than doubled in value. AIG is still over 80% owned by the government and owes Uncle Sam $80 billion in loans. But the fact that investors are willing to take a chance on it is partly a result of typical investor behavior after a brutal bear market. For a lot of investors, a 10% gain on a stock is not going to even make a dent in the huge hits they have taken, instead they need spectacular gains to make their money back -- AIG is now being seen as an opportunity to do that. In other words, the stock has become more of a lottery ticket than an investment vehicle.
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| Stock Analysis |
AIG started August at $13.72, currently it is trading at $40.83 and that is after a pullback over the last couple of days because at the end of August, the stock was changing hands north of $50. So what exactly is going on here? Here are the two oft-cited reasons for the recent bullishness. A) The market is very optimistic about the new CEO, Richard Benmosche, who took office just in early August. Benmosche has been at his boisterous best doing everything from calling out NY Attorney General Andrew Cuomo to proclaiming his independence from Washington and even halting AIG's asset selling spree. Traders have been encouraged by his moves because they believe he is not just a puppet of Washington but is focused on AIG's shareholders. He believes he can garner more value for AIG's assets by improving the businesses and holding out for higher offers. B) The market was encouraged by AIG's second quarter results which showed that the company earned a profit for the first time in six tries. It's impressive that a company which was rescued just about a year ago from the brink has started operating in the green so fast.
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Now should you buy what the market is selling in AIG? It's a judgment call. In addition to the bullish factors cited above, there are other possibilities that could come into play and push the stock even further up north. For example, if the economy continues to improve and the fears of a double-dip-recession are unfounded, AIG's core businesses such as insurance, investment products will pick up and the massive writedowns that the company had to take on its complex derivates and swaps books will reverse course and actually be marked up (in fact, we already saw hints of this in the second quarter). Also, Benmosche seems to have a better relationship with Hank Greenberg than his predecessors. Since Greenberg built AIG into the colossus that it is, he could offer great insight on how to unwind some of AIG's units. There is also talk of a government debt for equity swap which could be bullish plus maybe even a buyout of the entire company.
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However, let's not be delusional here. AIG is still under government control, 80% no less. Most analysts will tell you that there isn't much tangible equity on the balance sheet, i.e. if you were to pay off the liabilities today, the assets would be exhausted and more. Also, to make a serious play on AIG, you would have to a good amount of confidence in Benmosche. He had a successful career at MetLife (MET: Charts, News, Offers), but he is brash and has unilaterally moved away from AIG's strategy of shedding assets. His act is probably going to start to wear thin in Washington too and that is going to create further issues. The bottom line is that AIG is acting more of a lottery ticket than a stock and anytime you are gambling, you want to keep the numbers small and limit your exposure.
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Here are some other people befuddled by AIG's rally:
Inventing a Future for AIG -- There is a lot of fabrication in play here.
Will AIG slap around its obnoxious new CEO?-- It's been less than a month and the board is already getting tired of Benmosche.
Bob Benmosche Had a Long Talk With Bob Benmosche About His Mouth-- The title says it all.
Other stuff keeping traders awake before the long weekend
Not so fast Larry! -- The EU wants to look at the Oracle-Sun deal more closely
Google is losing its Chinese Chief
Absolut is having trouble moving some Vodka
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Profile |
Click here to view a detailed profile of AIG.
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