Does AIG’s Stock Support Higher Prices?

With shares of American International Group (NYSE:AIG) trading around $48, 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. AIG’s companies are also 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. Insurance companies will continue to grow, as new and existing risks continue to concern businesses and consumers worldwide.

AIG recently made its first dividend since the financial crisis, announcing that profit jumped 17 percent, and that a $1 billion stock repurchase had been authorized. AIG paid the government back the $182.3 billion from its bailout in December. Operating profit came in at $1.12 per share, beating the average estimate of 86 cents.

T = Technicals on the Stock Chart are Strong

AIG stock has seen its stock rise over the last couple of years. The stock is now trading at highs for the year, but it is coming up against key selling price levels. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are 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 above its rising key averages, which signals 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

24.82%

0%

0%

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

August Options

Flat

Average

September Options

Flat

Average

As of today, there is 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 what that means for AIG’s stock.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. In addition, reactions to the last four quarterly earnings announcements can 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

16.67%

-12.87%

-123.75%

-153.81%

Revenue Growth (Y-O-Y)

6.70%

-9.20%

-4.09%

38.76%

Earnings Reaction

2.68%*

5.67%

3.13%

-7.15%

AIG has seen mixed earnings and improving revenue figures over the last four quarters. From these numbers, it seems the markets have been happy with AIG’s recent earnings announcements.

* As of this writing

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 the overall sector?

AIG

Berkshire Hathaway

American Financial Group

OneBeacon Insurance Group

Sector

Year-to-Date Return

37.05%

30.97%

34.24%

4.32%

28.81%

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

Conclusion

AIG is an international insurance company that is beginning to show signs of positive growth. The company has made very positive announcements during a recent earnings release, which sat well with investors. The stock is now trading at highs for the year, but is now testing key selling price levels. Over the last four quarters, investors in the company have been happy with the company’s performance, but earnings have been mixed, while revenue figures have been improving. Relative to its peers and sector, AIG has been a year-to-date performance leader. Look for AIG to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from The Cheat Sheet