Hedge funds' 13F filings are finally rolling in for the third quarter, and so far we've come across a few surprises. It's probably easy enough to assume that some top-notch funds have been trimming their stakes in Apple (AAPL), or that gold miners have been a particular favorite, but you may not have heard about just how popular AIG (AIG) has become.
At the end of the third quarter, 110 of the 400 funds we track had long positions in the insurance giant vs. 61 at the end of the second quarter. That's an 80% increase -- nothing to sneeze at, especially since the names involved read like a "Who's Who" of the hedge-fund world. George Soros has made AIG the largest holding in his 13F portfolio, up from zilch last quarter. Julian Robertson's Tiger Management, Dan Loeb and Leon Cooperman are just a few of the billionaire managers upping the size of their AIG positions. So the logical question is: Why the bullish behavior?
Let's recall that the U.S. Treasury's interest in AIG has been steadily declining since the start of the year, and now rests at 22%. The government's latest sale of $18 billion, completed in September, moved the $182.3 billion taxpayer bailout into the green for the first time in its four-year history. With it, shares of AIG have broken past a key psychological barrier.
Following the transaction, in mid-October, shares of the insurer hit a 52-week high of $37.67. A moderate selloff has since pushed the stock back down to the $31 range -- but, on the whole, AIG has been an impressive investment since the start of the year, having generated a 34.7% return hat has easily outpaced the 17.5% industry average.
Now, it is tempting to conclude that falling Treasury ownership and double-digit appreciation justify getting into AIG, but the price action of this stock, like most things in life, isn't that simple. Concerns over Hurricane Sandy may have pushed the insurer to a more favorable valuation, giving individual investors a short-term window to monkey Soros and the rest of his peers. During the company's latest earnings call earlier this month, CEO Robert Benmosche stated Sandy wouldn't be a "huge issue for us financially," but that hasn't stopped the bears from getting their due.
After beating Wall Street's earnings consensus by double-digit percentage points in the third quarter, AIG is valued at a measly 8.9x five-year expected earnings, and trades at a discount of nearly 50% to its historical book value. Sell-side analysts are expecting bottom-line appreciation of 14% to 15% per year over the next half-decade, topping expectations for main competitors Hartford (HIG) and Prudential (PRU) by 200-plus basis points.
It is understandable if you haven't forgiven AIG for its recession-era meltdown, but now is one of the first times in recent history when its future truly does look bright. The company is now a leaner, meaner insurer, and its property/casualty and life/retirement segments have exhibited solid growth in each of the past four quarters. It appears Mother Nature has given investors a chance to buy in on a dip. The smart money already has.