Is American International Group A Worthwhile Investment?

With shares of American International Group (NYSE:AIG) trading around $41, 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

American International Group is an international insurance company, serving customers in more than 130 countries. The company serves commercial, institutional and individual customers through property-casualty networks of any insurer. In addition, American International Group companies are providers of life insurance and retirement services. Its segments include Chartis, SunAmerica Financial Group, Aircraft Leasing and Other Operations. Through its product offerings, American International Group provides risk products to a growing audience around the world.

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T = Technicals on the Stock Chart are Strong

American International Group stock saw a disastrous decline during the Financial Crisis due to a potential bankruptcy. The stock has attempted to recover in recent years but has struggled to make significant leaps forward. 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, American International Group is trading 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 American International Group options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

American International Group Options

30%

83%

80%

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

Put IV Skew

Call IV Skew

May Options

Flat

Average

June 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 significant 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 Mixed 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 American International Group’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for American International Group look like and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

-123.75%

-153.81%

33%

277.74%

Revenue Growth (Y-O-Y)

-4.09%

38.76%

2.64%

5.73%

Earnings Reaction

3.13%

-7.15%

1.62%

-3.83%

American International Group has seen mixed earnings and revenue figures over the last four quarters. From these figures, the markets have been confused with American International Group’s recent earnings announcements.

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P = Excellent Relative Performance Versus Peers and Sector

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

American International Group

Berkshire Hathaway

American Financial Group

OneBeacon Insurance Group

Sector

Year-to-Date Return

18.13%

18.87%

21.41%

-4.03%

16.99%

American International Group has been a relative performance leader, year-to-date.

Conclusion

American International Group provides important insurance products to consumers and businesses across the globe. The stock has suffered in recent years but is now trying to gain some ground and may be headed towards prices not seen since 2010 . Earnings and revenue figures have only confused investors in recent quarters. Relative to its peers and sector, American International Group is a year-to-date performance leader. Look for American International Group to OUTPERFORM.

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