Major indices finish lower amid GE earnings disappointment >>> READ MORE

3 Financial Stocks Worth Flirting With

AIG, SAN and WFC would look tempting after a small pullback

      View All  

American International Group

AIG NYSE:AIGYes, that American International Group (NYSE:AIG) — the same one that went to zero thanks to various kinky financial products that imploded when underlying mortgages went south. The company whose former honcho Hank Greenberg took hubris to a new level by threatening to sue the U.S. government and urging AIG to come along for the ride a few weeks back.

But while AIG might never be a popular company in the minds of many Americans, your portfolio could benefit from making friends. If you can hold your nose and invest, here’s why AIG is a good stock to own right now:

Tax Benefits: When AIG imploded, it “gained” the benefit of applying tens of billions in losses to future profits to offset taxes — with carry-forward losses a large reason the company posted a profit in fiscal 2012, including a $17.7 billion benefit from the IRS. Billions more in tax benefits remain, and some can be used through as late as 2030. This is a huge competitive advantage as the company rebuilds.

Simple and Streamlined: AIG sold off a bunch of assets to repay U.S. taxpayers for the bailout. However, it’s important to note that the moves also streamlined operations and headcount is half what it was just a few years ago. Its financial products business is no more, nor is its health insurance segment thanks to the sale of Alico to MetLife (NYSE:MET). AIG currently is in the process of ditching its airplane leasing business. Now, AIG is a simple run-of-the-mill company with two main pillars to its business: life insurance on one side and property-casualty insurance for homes and cars on the other.

U.S. Insurance Prices Rising: There has been a general uptick in property-casualty rates nationwide, with hurricane-averse states including Texas and Georgia seeing home insurance rates rise by double digits. This is no fun for homeowners, but the general environment protects margins for the industry — including AIG.

Low-Interest-Rate Burden Won’t Last: Insurers put premiums to work by investing in low-risk assets while their cash isn’t needed by policyholders for payouts. Unfortunately, low interest rates severely limit the profits that idle cash can safely generate. AIG will benefit when the Fed tightens policies and moves rates higher, which could be as early as the end of 2013 or early 2014 if you try and read the cryptic central banks comments.

Valuation Is Fair: AIG trades for half of its book value, and a forward P/E of around 11. Insurance giant and Dow component Travelers (NYSE:TRV) is in the mid-10s, and Allstate (NYSE:ALL) is in the high 9s.

Buy Under $35: AIG is running hot after adding 18% in the last three months, and coupled with the general feeling that there market is in store for a pullback, I would be reluctant to jump in now near a 52-week high. There also are risks to profitability that include a meager return on equity and lousy margins that lack peers in the insurance industry. As such, I think it’s responsible to be patient and not chase AIG; a pullback of 8% or 10% to the $35 range could give a great long-term entry point. News of another divestiture or of a dividend reinstatement could be a catalyst for a big move in the short term, and I remain convinced AIG has stabilized and has staying power in the long term.

Of course, watch AIG earnings at the end of February to either validate or refute these points.

Article printed from InvestorPlace Media,

©2017 InvestorPlace Media, LLC