whitney tilson

Whitney Tilson has now made American International Group, Inc. (NYSE:AIG) his largest position. We were one of the first media outlets to report that American International Group, Inc. (NYSE:AIG) replaced Apple as the favorite hedge fund stock. It seems that Whitney Tilson agrees with other hedge fund managers. Tilson also comments about Apple Inc. (NASDAQ:AAPL), which is not a top holding of his (as far as we know). Tilson’s favorite position was Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) it is now number two on the list. Tilson thinks that AIG is “crazy cheap” and thinks the stock could double over the next year or two. Tilson also thinks highly of David Einhorn’s idea of Apple creating “iprefs”. Tilson’s comments can be found below:

1) For the first time in a while, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) isn’t my largest position – American International Group, Inc. (NYSE:AIG) is (Berkshire is #2). The company reported solid earnings last night and the stock is up a bit today, but it remains crazy cheap. The key to understanding why this is such a great investment is rooted not in financial analysis, but rather management incentives. When the government was a shareholder (from late 2008 until just a few months ago), AIG’s pay practices were severely restricted. With the government now out, AIG can adopt a normal (ridiculously lucrative) corporate incentive package, including a big stock option package for senior management, which I expect in the near future now that Q4 earnings have been reported. The options will be struck at whatever the market price is at the time so, unlike pretty much every other company, AIG’s management has had incentive to keep the stock price LOW by DEPRESSING earnings. It’s hard to prove, but I think AIG has been doing exactly this by being over-reserved, paying claims extra fast, and taking their time returning capital to shareholders.

Well, all this is about to change. Once the new compensation plan is in place, management’s incentives reverse and I think AIG’s results will be spring-loaded over the next year, which is why I think the stock will double in the next 1-2 years.

I want to give a shout-out to Josh Sterling, the AIG analyst at BernsteinResearch. I normally don’t pay much attention to Wall St. “analysts”, but Josh has consistently done outstanding work on AIG. Here’s the page from his 1/28 report, AIG: At Half Book, Driving Earnings And Buying Back Stock. When Does The Market Discover The Demutualization Of ’13? (attached is the full report), in which he makes a compelling analogy that AIG today is like MET in 2000 – and guess who MET’s CEO was then? Benmosche!!!

2) I wasn’t able to listen to David Einhorn’s call yesterday about his iPrefs idea for Apple, but he not only posted his slides, but also the full transcript of his remarks at: www.scribd.com/fullscreen/126634859?access_key=key-3cjmbd6nenfqls059uc (I’ve attached it as well).

I think iPrefs are a brilliant idea that uniquely works for Apple, given its enormous pile of cash (“that exceeds the market capitalization of all but 17 companies in the S&P 500” – incredible!), huge cash flows, yet depressed multiple. By creating a dedicated high-yield instrument in this yield-starved environment, iPrefs would unlock a lot more value than more traditional techniques like a special dividend and/or an increase in the dividend and/or share repurchase program.

There aren’t a lot of companies in Apple’s particular situation, but I confidently predict that, whether or not Apple adopts this idea, other companies will.