Is AIG A Risky Investment?

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. Insurance companies will continue to rise to demand as new and existing risks continue to be of concern for businesses and consumers worldwide. Also, Bank of America (NYSE:BAC) is refusing to negotiate a settlement regarding Countrywide which may cause unease among investors.

T = Technicals on the Stock Chart are Mixed

AIG stock has been coasting higher over the last few years. The stock is now trading near a critical price zone that historically has seen some selling pressure. 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 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

31.33%

50%

47%

What does this mean? This means that investors or traders are buying a significant 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 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 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 decreasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have been optimistic about 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

27.45%

25.32%

23.76%

5.68%

18.91%

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

Conclusion

AIG is an international insurance provider that is still seeing a recovery from  the 2008 Financial Crisis. The stock has been coasting higher over the last couple of years but may be coming up against some selling pressure soon. Over the last four quarters, earnings have been decreasing and revenue figures have been mixed. However, investors in the company have been optimistic about the earnings reports. Relative to its peers and sector, AIG has been a year-to-date performance leader. WAIT AND SEE what AIG does in coming quarters.

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