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AIG Has 50% Upside: Bernstein

NEW YORK ( TheStreet) -- Shares of AIG (AIG - Get Report) were up nearly 4% on Friday, bucking broad market weakness, after Bernstein analyst Josh Stirling upgraded the stock to outperform and suggested that the stock may have a 50% upside in a "risk on" market.

The recommendation appears to hinge on the improving market and a continued appetite for financial stocks, which would enable AIG to sell non-core assets and use the proceeds to buy back the Treasury's stake, allowing the government to exit with a "victory lap" before the elections.

The government still owns a 70% stake in AIG, which has served as a major technical overhang for the stock. Investors have been reluctant to build positions in the stock ahead of a big sale by the government for fear that it will pressure prices.

But the government has more recently shown a willingness to sell its stake to AIG on a "cost basis," of $29, according to Stirling, which means AIG has the opportunity to sell non-core assets and buy back stock at half its book value, which is "highly accretive."

The Treasury's exit alone could act as a big catalyst for outperformance, according to the analyst. "The Treasury's Citi exit in 2010 suggests that even without any accretion from buybacks, the unwind of the overhang could unleash a powerful response, as Citi outperformed other financials by 30% in 2010 even while Treasury sold its stake, as investors, indexers and frontrunners all drove up the price of this previously under-owned name," Stirling wrote.

Separately, a report by CNBC that AIG was nearing an IPO of its airplane leasing business, International Lease Finance Corporation, also helped boost the stock. The IPO could raise $6 to $8 billion. The New York Fed is also reportedly seeking to sell AIG's Maiden Lane III Portfolio of mortgage-backed securities.

Stirling cautions that AIG will trade with financials if the environment deteriorates. He recommends risk averse investors buy AIG and sell the SPDR Financials Sector ETF (XLF) as a hedge.

--Written by Shanthi Bharatwaj in New York

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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