Join The Motley Fool for a conversation with author, investor and philanthropist, Whitney Tilson. In addition to managing Kase Capital, Whitney has coauthored More Mortgage Meltdown: 6 Ways to Profit in These Bad Times, Poor Charlie's Almanack, and most recently The Art of Value Investing, a collection of interviews with over 200 successful value investors.
A full transcript follows the video.
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Brendan Byrnes: Let's switch gears and talk about AIG (NYSE: AIG ) , which I believe is your biggest holding in Kase Capital. What are some catalysts, going forward for this company?
Whitney Tilson: I see a number. First of all, the business is just going very well. They just reported earnings last week. They blew buy consensus estimates by about 50%. The combined ratio -- one of the key metrics for insurance companies -- dropped about three full percentage points.
Certainly, just underlying performance of the business, and generally insurance, the kinds of insurance that they're in, pricing is strengthening around the world. It's not just AIG that's benefiting, but it helps to have a tailwind for the industry.
Secondly, AIG does not pay a dividend, has not been buying back stock, other than the government auctions as the government exited. But now I think their balance sheet is strong enough, now that the government has been completely bought out of AIG, I think the company has a lot of flexibility to do some good things on the capital front.
Then lastly, just cheapness. The stock's trading at about $0.66 of book value, so about a third discount to book. This is in a world where most insurers are trading at one times book value, so right there I see 50% upside, just on the valuation multiple, on a multiple of book.
I think there are two reasons why it's cheap. One is just general historical taint. People still think of AIG as this ward of the government and an immensely complex business. Neither of those is true anymore, but old perceptions die hard.
Secondly, the company still hasn't worked its way back to generating a decent return on equity. They have a 5% return on equity. I think they should get to 10% in the next couple of years, and that will help drive a revaluation as well.
The last thing I'll add on that, just by the way, is management just got their stock options struck, so they had very strong incentives to sandbag earnings, keep the stock price low...
Brendan: Buy back from the government at a low rate.
Whitney: ...to get the government out at a low price, and that worked. They got out, and the government sold out in the $30 a share range, and now the government's out, they've got their options struck, and now management incentives have completely reversed.
I think the quarter we saw that they just reported, where they blew by estimates, I see that happening for the next year or two, as I think they've got some spring-loaded earnings to report over the next year or so.