Here Comes Earnings Puffery. So Buy the Stock.

The American International Group is about to start â€" for the first time in years â€" trying to make its financial numbers look really good. And that is a reason to buy the stock.

At least that is the opinion of Whitney Tilson, a hedge fund manager. He writes in a e-mail he sends out with investment opinions:

“For the first time in a while, Berkshire isn’t my largest position - 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, AI 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.”

Companies often do have a lot of discretion in reporting earnings, and nowhere is that more true than in the insurance business, where such things as re! serve estimates can vary widely even if one assumes complete good faith on the part of those making the estimates.

Mr. Tilson, it would appear, does not assume such good faith.

In late trading Friday, A.I.G. shares were at $38.28, up $1. If he is right, they will approach $80 by early 2015.