By David Dale
A recent Goldman Sachs report shows that AIG has surpassed
Apple as the most-favored name among hedge funds. The report
showed 117 funds holding the stock, with 80 funds holding it as
a top-10 choice. Some in the media are speculating that AIG
will soon become the new market darling that everyone starts to
pile into, similar to Apple in 2012.
It's easy to see why that could happen. This is a stock that
has already shown strong demand in the past year, fully
digesting the sales by the US government, including its
remaining stake of $7.6B in Q4 alone. Despite the government
selling pressure, AIG is up nearly 40% in the past 12 months.
With that downward selling pressure behind it, new buyers
should lead to healthy appreciation.
As the media begins to spotlight the popularity among hedge
funds, will it begin to get the same crowding effect as Apple?
Big names such as George Soros and Bruce Berkowitz have
previously disclosed large positions, but new attention is
being drawn to recent 13-F filings showing growing large
positions held by Steve Cohen's SAC Capital Advisors, Leon
Cooperman's Omega Advisors and Dan Loeb's Third Point. As AIG
outperforms, and these titans enjoy large gains, it will become
a stronger lure for buyers fearful of missing out, just as
Apple did last year on its upward tear.
The strength of this self-fulfilling cycle should not be
understated, as evidenced by Apple's attraction of funds with
such varied strategies as dividend value (before Apple had
issued any dividend!) to high-yield corporate bond funds. One
report showed of Q3 2012 holdings showed that more than 800
hedge funds and mutual funds had Apple among their top ten
holdings. Such buying was a large reason for Apple's 75% rise
in the first nine months of 2012. While Goldman reported 80
hedge funds included AIG in their top 10, it has a lot more
upside potential before it can be called overcrowded.
In addition to the inflow momentum, AIG has the fundamentals
to back up the demand. The reported book value is up to $57.87,
and a price just below $39 makes for a price-to-book ratio of
about 0.65. With many comparable companies trading at about 1.2
times price to book, there seems to be great upside potential.
Even if AIG doesn't realize full book value on some of the
black-box assets they continue to unwind, a 0.65 book value
leaves plenty of room for safety. On an earnings ratio
analysis, forward price to earnings is 9.75. This is quite
conservative for a company in the early stages of a
In its recent expectation-beating quarterly earnings report,
the company reported an operating profit of 20 cents a share
compared to analyst expectations of an 8 cent loss. In
addition, chief executive Benmosche emphasized that AIG remains
on track to reduce loss ratios and continue pricing
improvements which should drive 2013 results.
Another factor that could add to a buying frenzy is capital
return. Continuing to clean up its balance sheet will lead to
credit upgrades, allowing AIG to seek dividend approval from
the Financial Stability Oversight Council. Benmosche said that
"as the year progresses, we will then begin to look at things
like could we add a dividend to the stock, and also could we
have some kind of a modest stock buyback."
AIG will continue to improving debt coverage ratios and shed
non-core assets, such as the sale of its aircraft leasing
division. This should open the doors for stock purchases by
large dividend funds. As seen with Apple, when a stock begins
to fall under multiple investing categories (growth, value,
yield, turnaround), demand can multiply. In addition, there are
no foreseeable negative catalysts to slow the momentum. As long
as this remains the case, a 'buy the rumor' effect can take
place on the anticipation of a cash return program in addition
to the company's profitability growth.
Momentum has been building as AIG continues to outperform
and draw attention from major hedge funds. When this happened
with Apple last year, it was quickly overbought and went
parabolic. AIG could be the new darling of 2013. Buy ahead of
the craze to reap the benefits?
David Dale is an independent market analyst in New York.
He was formerly a global markets analyst at RBC Capital
Markets. He is long AIG.