American International Group, Inc. (AIG): A Good Undervalued Stock to Invest In Now
We recently compiled a list of the 16 Most Undervalued Stocks to Buy Now. In this article, we are going to take a look at where American International Group, Inc. (NYSE:AIG) stands against the other undervalued stocks.
With the US stock market touching record highs, mainly driven by significant contributions from big technology sectors, domestic and global investors continue to observe market dynamics to tap potential opportunities. Therefore, identifying undervalued stocks becomes important as they might provide substantial value amidst high valuations across sectors.
Concentration of S&P 500
Courtesy of “Magnificent 7” stocks that captured investor attention in 2024, the market cap concentration in the leading US equities is the highest in decades. Strategists at Goldman Sachs believe the 10 largest US stocks now constitute ~33% of the S&P 500 index’s market value. This is well above the ~27% share reached at the peak of the tech bubble which was seen in 2000.
The present concentration helped in driving a period of strong US market returns. The market saw an annualized total return of ~16% over the previous 5 years. This compares to the 30-year annual average of 10%. As per Goldman Sachs, the top 10 stocks made up for over a third of that gain. That being said, “today’s top stocks are trading at lower valuations than the largest stocks did at the peak of the tech bubble in 2000.”
Despite healthy returns, investors are anxious regarding the extreme current degree of market concentration relative to the recent history.
There appear to be similarities between the current conditions today and the episodes in 1973 and 2000. The labor market seems to be in a decent state, and concentration has been rising along with robust equity market returns. In these episodes, the peak of equity market concentration also led to the peak of a bull market, and the US economy saw recessionary fears in the subsequent year.
However, the 1964 experience reflects that an ongoing bull market might continue to move higher despite a decline in market concentration. After the market concentration peaked, stock prices and the US economy were resilient for an extended period.
Are The US Stocks Overvalued or Undervalued?
The valuations of the largest stocks are well below the previous highs. As of now, the 10 largest stocks continue to trade at the collective forward P/E multiple of ~25x, well below the peak valuations seen in the largest stocks in 2000, 2020, and the middle of 2023.
The valuations are also lower based on the premium the largest stocks are trading at relative to the rest of the market. That is to say that the ~35% valuation premium today remains well below the 80% premium seen in the middle of 2023 and the 100% premium of 2000. Though the degree of market cap concentration is indeed higher today as compared to the peak touched in 2000, the largest stocks are trading at much lower multiples than during the technology bubble.
Our methodology
We used the Finviz screener to extract the list of 16 Most Undervalued Stocks to Buy Now. We have shortlisted the stocks that are expected to report earnings growth this year and have a forward P/E multiple of less than ~21.66x (as the market trades at the forward multiple of ~21.66x). We ranked the stocks in ascending order of their hedge fund sentiment.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A professional advisor helping a client with an insurance policy, highlighting the company’s attention to customer service.
American International Group, Inc. (NYSE:AIG)
Forward P/E as of August 22: 12.33x
Number of Hedge Fund Holders: 61
Expected EPS Growth this Year: 21.6%
American International Group, Inc. (NYSE:AIG) is one of the largest insurance and financial services firms with a global footprint. The company operates through various subsidiaries that provide property, casualty, and life insurance.
The company’s homeowners insurance seeks to benefit from scale and allows it to provide features like high deductibles which can reach as much as $10,000. American International Group, Inc. (NYSE:AIG) has reported a strong 2Q 2024, announcing a 38% YoY increase in adjusted after-tax income, reaching $775 million. The company has been focusing on achieving a 10% plus return on equity (ROE) target via underwriting discipline, expense management, and capital optimization.
The company has made more progress by selling its stake in life insurer Corebridge recently while repositioning the portfolio through several divestitures. Therefore, this turnaround in the business is expected to support American International Group, Inc. (NYSE:AIG) moving forward.
The company’s earnings growth is expected to be driven by its focus on underwriting excellence and continued expense discipline. The repositioning of the underwriting portfolio enabled it to deliver high-quality growth in both admitted and non-admitted markets with several points of entry to deploy capital towards the most attractive risk-adjusted returns.
Analysts at BMO Capital Markets increased their price target on the shares of American International Group, Inc. (NYSE:AIG) from $88.00 to $89.00. They gave the company an “Outperform” rating on 13th May. Additionally, a total of 61 hedge funds held stakes in American International Group, Inc. (NYSE:AIG) as of the end of the second quarter, according to the Insider Monkey database.
ClearBridge Investments, an investment management company, released first quarter 2024 investor letter. Here is what the fund said:
“One example of our internal return engine is our continued large position in American International Group, Inc. (NYSE:AIG), which we have owned for roughly 10 years. We originally bought AIG at a greater than 30% discount to our initial estimate of business value. This entry point assumed minimal improvements in the business but allowed us to absorb some inevitable downdrafts along the way that we took advantage of to build our position. The key, however, is that during this period AIG management dramatically improved their business. The company has compounded intrinsic business value per share at a double-digit rate by reducing risks as management overhauled their underwriting process, strengthened their balance sheet, cut expenses and operational complexity and structurally improved returns on equity. A major source of added lift came from intelligent capital allocation: shares outstanding have been more than cut in half during this period, as management bought back roughly 5% of the company annually below intrinsic business value.
However, this valuation-driven return engine can only create so much lift on its own. We are always looking for big opportunities to create external lift in our returns from dramatic shifts in markets. The first comes from exploiting market extremes, where the long-term probabilities are very much in our favor, while the second comes from investor underreactions to big shifts in pricing power that can be exploited through our valuation-driven lens.”
Overall AIG ranks 7th on our list of the most undervalued stocks to buy. While we acknowledge the potential of AIG as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than AIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.