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The Big Money Says Don't Buy Ambac Financial

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One of the great maxims of traders and Wall Street pros is to follow the "smart money."

I'm not much for the thesis that institutional shoppers tend make smarter investing decisions, but many of you who've read my ruminations on insider buying say you'd also like to know how the Big Money is betting. Your wish is my command.

Next up: Ambac Financial (NYSE: ABK  ) . Are institutions bullish or bearish when it comes to this one-time mortgage insurer?

Foolish facts


Ambac Financial

CAPS stars (out of 5) *
Total ratings 1,152
Percent bulls 65.2%
Percent bears 34.8%
Bullish pitches 147 out of 187
Highest rated peers The Chubb Corporation, Progressive Corp., Allstate

Data current as of Oct. 27.

Fools haven't liked Ambac for a while, and for good reason. When the subprime crisis turned into a full-scale housing meltdown, the company was overwhelmed with mortgage insurance claims and a once-black income statement turned red with $5.6 billion in 2008 losses.

Profits returned recently, but if investors remain reticent it's because there's still finger pointing over who's responsible for paying out for bad loans. For example, up until last week, Ambac and bankrupt Lehman Brothers were locked in a dispute over $6 billion in claims.

Speculators, for their part, have piled into the stock on hopes the company would be able to reclaim funds from banks for failing to meet standards when writing loans Ambac insured. If the effort proves successful, Bank of America's (NYSE: BAC  ) Countrywide division, which Ambac sued in September, would have to write some very big checks.

"I have hopes they will win lawsuits or get nice settlements. Not so sure about continuing business, but in 5 years anything could happen," wrote Foolish investor vanzweb earlier this week. "It's an interesting speculative stock for day traders, too volatile for long termers. We'll know more about their fate in the upcoming 6-month trend."

Institutional ownership history

Top Owners





The Vanguard Group










Citigroup Asset Mgmt.





Third Avenue Management





Brigade Capital Management










Source: Capital IQ, a division of Standard & Poor's.
*Indicates the number of shares owned.

On an annualized basis, the Big Money bet on a 2009-2010 recovery in Ambac shares, only to end up disappointed. The stock is down more than 25% since January of 2009. The S&P 500 has rallied more than 26% over the same period.

Institutions don't like to wait for profits, so it's unsurprising to see some of them trimming their exposure to this very speculative play.

Competitor and peer checkup


Institutional Ownership

Insider Ownership

Ambac Financial 30.17% 0.35%
Assured Guaranty (NYSE: AGO  ) 86.20% 0.80%
MBIA (NYSE: MBI  ) 75.66% 2.77%
MGIC Investment (NYSE: MTG  ) 83.67% 2.41%
PMI Group (NYSE: PMI  ) 60.80% 2.44%
Radian Group (NYSE: RDN  ) 67.56% 3.67%

Source: Capital IQ. Data current as of Oct. 27.

Ambac may be risky, but judging by this table, there's huge upside if the lawsuits lead to large settlements, which would force institutions back in. With just 30% ownership, they could push the stock multiples higher than it is today.

If you're looking for a lower-risk play in this sector, Radian may be the better bet. Like Ambac, its losses have been significant and peer PMI Group's earnings results recently disappointed, but Radian insiders have bought shares at prices well above what the stock trades for today.

Now it's your turn to weigh in. Do you think the institutions are wrong about Ambac and its peers? Let us know what you think using the comments box below. You can also recommended other stocks for Tim to evaluate by sending him an email, or replying to him on Twitter.

Interested in more info on Ambac Financial? Add it to your watchlist here by clicking here.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is smarter than the average bear.

Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 30, 2010, at 3:04 PM, DEALWITHTHEDAY wrote:

    Re-Listening to MBIA call. They were very positive about the law suits and getting return on these as they call them bad loans. This is what I would expect them to say. If a large settlement is required from the banks that that would be positive for these companies. They would help them in the short run and allow them to cover the expenses due to these loans. A large settle would impact the banks such as BAC. My thoughts and questions are around using BAC and MBIA to off set each other through this crisis as the media calls it. What I would like from the fools is first give me you thoughts on the hedge company to company. Also what would be a good percentage hedge company to company.

  • Report this Comment On October 30, 2010, at 7:28 PM, ganit wrote:

    The government aids ABK, they can report whatever they want for earnings and then claim typographical errors with zero punishment. ABK will smoke earnings on the 9th to stay listed. If ABK files BK, the banks will have to mark to market the derivatives insured by ABK to market value which will lower their loan capital ratios and instantaneously violate OSHA requirements. Additionally, the municipal bonds will be downgraded and forced to pay higher yields in which they can't afford. ABK is the best buy in the marketplace, while everything else is overbought, ABK is oversold and on the brink of the greatest turnaround in American history. First, ABK will report positive earnings and stay listed, second, the Judge will approve the segregated account, third, the banks will begin to settle which will allow the segregated account to be paid ahead of schedule and ABK to initiate new insurance policies on municipal bonds as they are the largest insurer of municipal bonds. Lastly, ABK will survive and thrive in a market (municipal bonds) which consists of 70% of retirees investment portforlios. I personally picked up another 3k worth of call options on Friday and I thank God for a lower price of ABK whick allows me to add to my position at a lower cost.

    I started buying put options on CIT 3 months before the filing. I bought my cheapest position 5 days before the filing. YOu would think that the closer CIT became to filing as clearly the insiders know as their lawyers were actively preparing the filing for at least a month that the stock would of gotten cheaper going into BK. It was the opposite, the price of the stock was going up which caused many to think CIT was going to survive and they were buying. Most people look at the direction of the stock to tell them what is happening. Thats what the institutions want you to do. Instead, look at the facts which so many miss. This is what was really happening to ABK on Friday despite the sell off.

    JPM is the leader of the banks, the rehabilitators motion is ABK's representative. The rest of the banks and hedgefunds will be released in quick succession and the Judge will approve the plan of rehabilitation.

    Pay attention to the details, not the price of the stock in which we all know is manipulated to make you think the opposite or reality. Opportunities like ABK only come around once in a decade. A company thought to be BK which not only isn't, ABK will regain its roll as the dominant force in insuring municipal bonds which is sowed into the fabric of the American way of investing for a balanced portfolio. Municipal bonds are responsible for sewer, roads, schools, the entirety of the American infrastructure.

  • Report this Comment On November 02, 2010, at 3:33 PM, dumaka77 wrote:

    Ganit - You're so full of it I swear. ABK is going Chapter 11. So please shut up.

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Related Tickers

5/3/2013 3:59 PM
ABKFQ.DL $20.40 Down +0.00 +0.00%
Ambac Financial Gr… CAPS Rating: ***
AGO $30.08 Down -0.01 -0.03%
Assured Guaranty CAPS Rating: **
BAC $16.87 Up +0.15 +0.90%
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MBI $7.97 Down -0.23 -2.80%
MBIA CAPS Rating: **
MTG $8.45 Down -0.08 -0.94%
MGIC Investment CAPS Rating: ***
PPMIQ.DL $0.03 Down +0.00 +0.00%
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RDN $14.35 Down -0.01 -0.07%
Radian Group CAPS Rating: ***