When my client Larry learned that I had purchased shares of American International Group (symbol AIG) for him, he shot me an e-mail. “Is this the same AIG that almost destroyed the world?” “Absolutely,” I replied. A follow-up e-mail asked: “Is this the same AIG that makes investors want to puke?” “You got it,” I said.
AIG isn’t the only bailout play in my portfolio. I also own General Motors (GM). I’ve made the stocks of both companies top-ten holdings because I see them as classic values. Their businesses are performing far better than investors think, yet they are loathed because of how they performed in the past.
Bailout Fallout
The political climate may have something to do with the stocks’ low prices. Millions of Americans revile the federal government. Even more hate bailouts. (Ameriprise, with its finger to the wind, has Tommy Lee Jones bragging in TV ads that the company has never taken a bailout.) Given these strong feelings, do you think Tea Party fanciers are lining up to buy AIG and GM? No way.
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Some reasons for avoiding these stocks make sense. Analyst Gloria Vogel, of Drexel Hamilton, an investment banking and brokerage firm, says institutional investors worry about the large amount of AIG stock that the feds own (the Treasury holds 70% of AIG and 32% of GM): “They say, ‘Why should I buy now?’ But that concern and other worries are already baked into the price.”
And then some, I would argue. No one, understandably, wants to be the moron who buys AIG and GM before an announcement of a government sale tanks the stocks. Try explaining that one to your boss. Indeed, AIG shares fell nearly 4% on March 8, when the Treasury sold $6 billion worth of AIG stock (AIG bought half the offering).
Actually, the risk posed by the Treasury unloading more AIG shares may be less than it seems. CEO Robert Benmosche said recently that AIG could end up buying back an even bigger chunk of its stock from the Treasury. By Election Day, AIG should have billions of dollars to devote to such buybacks.
Buying back shares from Uncle Sam would be a win-win-win for AIG. First, it would diminish the overhang of shares that the Treasury could sell. Second, given that AIG, at $28, trades at a 49% discount to book value (assets minus liabilities) of $55.33 per share, every share it buys back makes its remaining shares more valuable. Third, a buyback would help change market perception.
AIG’s prospects are improving as it raises insurance rates. Its SunAmerica asset-management unit is once again seeing money flow into its funds. Fairholme Fund’s Bruce Berkowitz, who had 26% of the fund’s assets in AIG at the end of 2011, says the company is capable of earning $4 per share. Not bad for a $28 stock.
Two final points: The media may mock AIG, but 97% of Fortune 1000 companies still use its services. As for the financial-products unit, which did almost destroy the world, about 90% of its derivative exposure is gone, and most of what remains is used for low-risk hedging activity or should retain or increase its value over time.
Meantime, GM, often derided as “Government Motors,” has regained its position as the world’s top carmaker. GM’s joint ventures in China are performing well and are worth $10 per share, nearly 40% of GM’s $26 share price. GM has 13% of all new-car sales in Brazil, Russia, India and China—the highest percentage of any carmaker.
Granted, GM used to be a lousy company, but times have changed. Hourly costs per worker have plunged by 30%. Some smart people have replaced the dunderheads who ran the company into the ditch. And the stock sells for less than six times the $4.59 per share that analysts, on average, expect GM to earn in 2013.GM and AIG are clearly cheap, but many investors think the past is always prologue. Not so this time.
Columnist Andrew Feinberg manages a New York City–based hedge fund called CJA Partners.
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