This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

And speaking of the best...
When the Treasury Department announced last week that it was freezing the CEO salaries at U.S. "subsidiaries" Ally Financial, General Motors (NYS: GM) , and AIG (NYS: AIG) , pity parties down here on Main Street were few and far between. One CEO in particular, however, AIG head Robert Benmosche, was reportedly spotted crying yesterday -- crying all the way to the bank.

With federal regulators under pressure to minimize cash outlays to the bosses of the businesses it's taken as its wards, Mr. Benmosche, who took over AIG to help turn around the fledgling insurance giant, can expect to receive the vast majority of this year's $10.5 million pay package in the form of stock. On one hand, that sounds like a good idea. It should incentivize him to get the business back on track ahead of the government's planned sale of its remaining 70% stake in the company. On the other hand, it stands to give Mr. Benmosche a big payday.

Or so it seems to the analysts at Wells Fargo (NYS: WFC) , itself a former TARP beneficiary. Earlier this week, the investment banker upgraded shares of AIG to "outperform" ahead of their release from U.S. ownership -- and even Wells predicts this will play out "over the course of the next year." Removing the onus of state ownership, says Wells, should give a big boost to the stock. When you add in the effect of stock repurchases, financed by AIG's unloading of its interests in various subsidiaries and other assets, Wells sees AIG shares rising from their current $33 valuation to as high as $45 -- a 36%, one-year gain.

And that number could even be conservative.

Valuation matters
Consider: Shares of AIG have generally lagged the market's rise over the past year, underperforming the S&P 500 by about 10 percentage points. As a result, this $33 stock still costs a bare 3.5 times trailing earnings -- a fraction of the 19 times valuation at Berkshire Hathaway (NYS: BRK.A) or the 16 P/E at Hartford Financial (NYS: HIG) , despite the fact that consensus estimates show AIG growing its profits at a faster clip than either of these rivals -- 10% per year over the next five years. This makes for a very tasty-looking PEG ratio of 0.35 on AIG stock, and it could do even better.

Free at last
Key to Wells' buy thesis on AIG is that once free of government control, Mr. Benmosche will have even greater incentive "to become an increasingly active capital manager, which could be accretive to the company's earnings per share and return on equity." Wells posits fiscal 2012 earnings of $3.06 per share for AIG in 2012, and $3.38 per share in 2013. These numbers lap consensus projections by 12% and 17%, respectively, and appear to predict an absolute surge in profitability at the company post-spinoff from the U.S. Government.

With AIG's "combined ratio" on property and casualty underwriting finally falling, after years of inexorable (and unprofitable) hikes, the company looks to be on the right track to prove Wells right -- and maybe even make shareholders rich in the process.

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At the time thisarticle was published Fool contributorRich Smithdoes not own or short shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 347 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Wells Fargo. The Fool owns shares of and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo and General Motors.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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