Is This Insurer Cheap According to Graham?http://www.fool.com/investing/general/2012/09/05/is-this-insurer-cheap-according-to-graham.aspx Robert Eberhard
September 5, 2012
Earlier this year, I spent some time dissecting Benjamin Graham's The Intelligent Investor, the seminal book on value investing. Along the way, I talked about the Graham number as a means of valuation when it comes to stocks. The formula is pretty straightforward: Multiply earnings per share by book value per share, then multiply that by 22.5, and finally take the square root. The result, in dollars, is the Graham number.
However, a quick check can help determine whether a company might be worthy of a look using the teachings of Graham. He said that in an ideal situation, the P/E ratio and P/B ratio multiplied together should not exceed 22.5, with a maximum P/E ratio of 15 and P/B of 1.5. With that in mind, I looked at the stocks of the S&P 500 that met this ideal situation. Currently, there are 71 companies in the index that meet these criteria. I will be making a CAPScall on these companies after comparing them with competitors and their current value in relation to their Graham numbers. Up next is insurer American International Group (NYSE: AIG ) .
What is it?
Things have turned around of late for the insurer, however, and it shouldn't be long before its obligation to the government is paid in full. It is currently trading at a steep discount, fetching a 43% markdown to its book value. Its derivatives business, the unwieldy beast that helped accelerate its near demise four years ago, has been widely unwound, with only 5% remaining and on the way out. This should help strengthen the insurer going forward, unlocking some untapped value in this former pariah.
What's it worth?