Can AIG Continue Its Surge Higher?

With shares of American International Group (NYSE:AIG) trading around $45, is AIG an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

AIG is an international insurance company, serving customers in a wide range of countries around the world. AIG companies serve commercial, institutional, and individual customers through property-casualty networks of any insurer. In addition, AIG’s companies are providers of life insurance and retirement services. AIG’s segments include Chartis, SunAmerica Financial Group, Aircraft Leasing, and Other Operations. The company suffered greatly during the 2008 Financial Crisis but is now on the road to recovery.

AIG and GE Capital (NYSE:GE) have been designated by the Financial Stability Oversight Council as being non-bank “systemically important financial institutions.” The two companies will now be subject to regulation under the Dodd-Frank financial reform act, which means the companies will face government scrutiny, as they could pose a threat to a financial system in crisis. Insurance companies will continue to rise to demand as new and existing risks continue to be of concern for businesses and consumers worldwide.

T = Technicals on the Stock Chart are Mixed

AIG stock has been steadily trending higher over the last couple of years. The stock is now bumping-up against selling pressure so it may need time here before its next move. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, AIG is trading slightly above its rising key averages which signal neutral to bullish price action in the near-term.

AIG

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of AIG options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

AIG Options

29.93%

6%

4%

What does this mean? This means that investors or traders are buying a very minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very minimal amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Decreasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on AIG’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for AIG look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

-12.87%

-123.75%

-153.81%

33.00%

Revenue Growth (Y-O-Y)

-9.20%

-4.09%

38.76%

2.64%

Earnings Reaction

5.67%

3.13%

-7.15%

1.62%

AIG has seen mostly decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have generally been pleased with AIG’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has AIG stock done relative to its peers, Berkshire Hathaway (NYSE:BRKB), American Financial Group (NYSE:AFG), OneBeacon Insurance Group (NYSE:OB), and sector?

AIG

Berkshire Hathaway

American Financial Group

OneBeacon Insurance Group

Sector

Year-to-Date Return

29.35%

28.18%

29.12%

5.04%

23.61%

AIG has been a relative performance leader, year-to-date.

Conclusion

AIG is an international insurance company that is now known as a non-bank systemically important financial institution and subject to Dodd-Frank regulations. The stock has been steadily trending higher but is now up against a selling zone where it may spending some time before making its next move. Over the last four quarters, earnings have mostly been decreasing while revenue figures have been mixed, although investors in the company have generally been pleased with what they’ve heard during earnings announcements. Relative to its peers and sector, AIG has been a year-to-date performance leader. WAIT AND SEE what AIG does this coming quarter.

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