AIG's 'Zombie' Stock Will Kill You

(Updates to add details of Moody's report.)

NEW YORK (TheStreet) -- The direction of American International Group(AIG Quote) for speculative investors rode largely on third-quarter results. Now that they're in, here's the verdict: Dump the stock.

AIG is overpriced, and the risk is no longer factored in. It should be a $10 stock, not one that sells for $36. Zombies have become a theme in books, movies and publicly traded companies, but AIG is one zombie stock to avoid.

When the government bailed out AIG, investors should have bailed. Some day traders have made a killing, as the stock alternately rose and fell 50% from one day to the next.

Aside from the fact that AIG isn't performing as well as the headline profit figure would have you believe -- and we will look at that in a minute -- the insurer's stock is selling at an incredible 96% of book price, according to SNL Financial. That's completely inappropriate for a stock with this level of risk exposure.

Until the third-quarter figures were crunched, AIG's problems weren't so obvious. The price-to-book-value last week was about 34%, arguably an appropriate level for this stock, reflecting the risk inherent in owning it.

Now, the book value has been reduced significantly, and the price-to-book-value has risen exponentially. Even after a drop of close to 10% on Friday (and a 2% increase yesterday), the price-to-book-value of 96% yesterday should send a "sell" signal to anyone still holding the stock.

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