AIG: In Band's Bargain Bin

02/07/2003 12:00 am EST


Richard Band

Editor, Profitable Investing

I've taken a cautious tack and our current accent is on preserving capital," notes Richard Band, editor of Profitable Investing. "But I don't want you to think I've thrown in the towel on stocks. When this rough patch is over, we're likely to enjoy a string of years with double-digit profits. So rest assured that the good times will soon roll again." For now, Band is focusing on conservative, value and growth plays.

"This savage bear market is winding down to its final innings. How do I know? Because the bruin has now chewed up just about every one of yesteryear's glamour stocks--and spit them out as old-fashioned bargains. American International Group (AIG  NYSE) is the latest victim. The giant insurer recently announced it's taking a $1.8 billion after-tax charge to strengthen its reserves. Policy claims turned out higher than American International had estimated in the areas of workers compensation and officers'/directors' liability. While this is a sizable write-off, it in no way affects the firm's solvency or long-term profitability. Within a few quarters, higher premiums will earn back these losses (just as the company's bottom line quickly bounced back from the World Trade Center disaster). Unlike some other insurers, American International Group isn't saddled with large asbestos claims or other 'time bomb' liabilities. Thus, the recent sharp drop in the stock presents a fine buying opportunity. At 13X this year's estimated earnings, American International is now priced like a value stock rather than the growth stock it really is. We consider the stock to now be in the bargain bin. Tuck away a few shares below $56. We'll plan to add some more as a clearer bottom for the overall market comes into view."

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