These 2 Left-for-Dead Stocks May Be Huge Opportunities

I have to come clean.

When our co-founder David Gardner recommended Ford (NYSE: F  ) in our Motley Fool Stock Advisor newsletter last November, my gut reaction was: "Yikes!"

Never having looked at Ford too closely, my general impression of the company was that it was the strongest American car manufacturer -- which is akin to being the most conservative no-documentation-needed subprime lender or the smartest reality show cast member.

My impression changed after I covered Ford CEO Alan Mulally's press conference at the Washington Auto Show in January (read my thoughts here). The more I looked into Ford, the more I liked its turnaround story, and the more I realized that I had fallen into a trap.

Those who were able to reserve judgment and heed David's pro-Ford arguments back in November are beating the market by 30%. Those like me who made a snide "Fix or Repair Daily" remark and moved on have missed out.

Today, there are two companies that are being similarly overlooked. If the bulls are right about them, they could be big winners from here.

The background
Before I reveal the two stocks, you need to know a little about Bruce Berkowitz, who runs the Fairholme Fund. The guy is an absolute stud.

Morningstar named him "Domestic-Stock Fund Manager of the Decade" back in December. While the S&P 500 was down slightly in the 2000s, Fairholme Fund generated a 13.2% annualized return. Remember, that's through the dot-com bubble and the housing bubble.

His specialty is these Ford-like stocks that folks offhandedly dismiss. And he's not afraid of going in big-time on them either. As of his last filing, a whopping 57% of his portfolio was in financials. Included in his top 10 holdings are Citigroup (NYSE: C  ) , Bank of America (NYSE: BAC  ) , and Regions Financial (NYSE: RF  ) . Citi and Bank of America are the two megabanks with the most bad press and known balance sheet problems. Regions Financial is, as its name suggests, a regional bank whose stock has been beaten down to a price-to-book value of 0.6 because of its commercial-real-estate-and-construction-loan-laden balance sheet.

When you go garbage-diving, even the treasure is smelly. The question in these situations is whether the market is so blindly, unthinkingly down on these stocks that there is opportunity.

These three may be such cases, but Berkowitz's latest big move involves two other companies.

Two stocks that have been left for dead
The ignored stocks Berkowitz is buying? AIG (NYSE: AIG  ) and MBIA (NYSE: MBI  ) .

How's that for a left-for-dead pair?

To recap, AIG was duped by Wall Street into insuring a ridiculous percentage of the housing bubble fallout via credit default swaps, was bailed out by the government to the tune of an 80% stake, made headlines by fighting post-bailout for its employees' crazy-high bonuses, has a former CEO who got the company into various lawsuits and investigations revolving around allegations of accounting fraud, and recently had its chairman resign after losing a battle of wills with its current feisty CEO.

You may be less familiar with MBIA. Like AIG, MBIA and its even more distressed competitor Ambac Financial (NYSE: ABK  ) got into trouble straying from their core insurance businesses. MBIA and Ambac normally insure municipal bonds, but they proceeded boldly (and heavily) into the world of insuring real-estate-backed securities. Oops.

So, yeah, there are legitimate reasons AIG's stock is trading at less than 2% of its reverse-split-adjusted highs and MBIA's fell from over $70 to under $7. For the same reasons, both AIG and MBIA have large short interest in their shares.

Why there is opportunity
But Berkowitz is betting big on both. How big? He owns 24.3% of the AIG shares the government doesn't; he owns 11.1% of MBIA.

Berkowitz's likely thesis is that each has fallen so much that they're essentially options. In other words, if he's wrong, he's braced to lose all his money, but if he's right, the stocks could go up many times over.

The buy case for AIG in particular resonates with me.

The disdain for the stock and the number of moving parts has my radar going off. At its height, AIG had a market capitalization north of $200 billion. Right now, it's less than $5 billion. But you also have to factor in the government's involvement. AIG has up to $182 billion of bailout funds available to it (of which it's taken well over $100 billion). Depending on how much bailout money AIG ultimately takes, how effectively it raises cash through asset sales, the remaining strength of its core businesses, and how onerous the government wants to make the payback, AIG could be a steal.

Though AIG and MBIA have been left for dead and could be presenting opportunities, picking through corpses isn't for everyone. There's much risk, and the rewards can be a long time coming -- Berkowitz plans on holding AIG for a decade.

If you're looking for some less complicated stocks, check out these 5 Companies You Can Buy Today. If you want to continue the conversation on AIG and MBIA, join me in the comments section below.

Anand Chokkavelu owns shares of Citigroup. Ford Motor is a Motley Fool Stock Advisor recommendation. The Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (58)

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 July 19, 2010, at 12:57 PM, RaulChapin wrote:

    I decided a while ago that instead of buying my weekly lottery ticket, i would use that cash to bet on opportunities like the ones you talk about.

    My lottery money is feeling Zoombie like and might have some AIG for dinner!!

    Thanks for the article.

  • Report this Comment On July 19, 2010, at 1:12 PM, TMFBomb wrote:

    @RaulChapin,

    Remember to do your own due diligence...and good luck!

    -Anand

    PS...hmm, scratch-off stocks.

  • Report this Comment On July 19, 2010, at 1:48 PM, plange01 wrote:

    both ford and aig will never survive the growing depression.ford was in serious trouble long before the economy collapsed and aig owes american taxpayers 160 BILLION!!! those taxpayers want it back now!!

  • Report this Comment On July 19, 2010, at 2:43 PM, faultytriangle wrote:

    Why buy the AIG or ABK stocks? They both have convertible preferred stock which are paying interest at 79 -80 %. I have already collected more than I paid for them. I also have the debt issued by both, but they have run up in value; the interest is only 9-22%.

  • Report this Comment On July 19, 2010, at 4:05 PM, miteycasey wrote:

    both ford and aig will never survive the growing depression.ford was in serious trouble long before the economy collapsed and aig owes american taxpayers 160 BILLION!!! those taxpayers want it back now!!

    What's your basis for the Ford Comments?

    1) they have reworked many of their Union deals

    2) didn't take government money.

    They also survived the down swing.

    What keeps you from believing they won't thrive?

  • Report this Comment On July 19, 2010, at 6:23 PM, wolfhounds wrote:

    How many readers have 10 years and enough speculative money to risk an out sized return on AIG? You mentioned the problems the company faces except the most important - the governments 80% stake may become 100% wiping out all publicly held shareholders. It's not improbable. AIG will eventually sell some very good assets to repay Uncle Sam - the very same assets creating value. What's left when the asset sales are over? Where does enough value remain for shareholders, and how do you calculate it?

    There are plenty of undervalued companies with no debt and plenty of cash if investors want risk.

  • Report this Comment On July 19, 2010, at 6:58 PM, TMFBomb wrote:

    @wolfhounds,

    I tried to make those points clear in the last three paragraphs because I share some of those concerns. To be clear, AIG isn't for everyone (or for most investors, perhaps). It is a very difficult company to understand and analyze ...which is why, in the last paragraph of the article, I put the link to an article sharing some more straightforward companies.

    Fool on,

    Anand

  • Report this Comment On July 19, 2010, at 9:04 PM, shangshangBBA wrote:
  • Report this Comment On July 19, 2010, at 10:14 PM, FoolTheRest wrote:

    Nice article, Anand. Last year AIG stock was entirely too speculative for me, but the bonds were just about right. I think Bruce is right, but I just do not have the stomach for the "guess what government does next" game. So I am happy with my stake in Fairholme and I'll let him deal with it on my behalf.

  • Report this Comment On July 20, 2010, at 7:11 AM, anuvaka wrote:

    So the stock has fallen to basement levels, the question is will it rise to it's former heights?

    Ford had a strong position, in not taking govt money and restructuring past the Union debt, but AIG and MBIA cannot make the same argument. This would be a long term holding with no guarantees along the way. Berkowitz can afford to take this chance as well as wait.

    I think I will let this one pass.

    jC

  • Report this Comment On July 20, 2010, at 7:20 AM, Gregeph wrote:

    The article states, "Berkowitz's likely thesis is that each has fallen so much that they're essentially options. In other words, if he's wrong, he's braced to lose all his money, but if he's right, the stocks could go up many times over."

    Graham stated that investing should be based upon thorough analysis and should promise both safety of principal and an adequate return. "He's braced to lose all his money" seems to flunk this test.

    If you are going to speculate in AIG, it is important to do it with your eyes wide open. http://gregspeicher.com/

  • Report this Comment On July 20, 2010, at 8:01 AM, ziq wrote:

    Duped by Wall Street? I don't know if that's exactly what happened. They were certainly sold down the river.

    It's said one has a greater chance of being struck by lightening than winning the lottery. I'd lay similar odds here. Personally, I'll stick with investing.

  • Report this Comment On July 20, 2010, at 11:04 AM, yaiwolf wrote:

    This article turned me off when the author calls a fund manager a "stud"... give me a break...is this the best the writer can do?

  • Report this Comment On July 20, 2010, at 12:18 PM, financeguy85 wrote:

    I have to say this is pretty shallow analysis for a CFA. The buy case is summed in two points: one, because a well-known financial manageer bought, and two, because they've lost hundreds of billions in market cap? Just because a stock's market cap has fallen from $200 billion to $5 billion doesn't mean anything. It's foolish to jump in and think you're about to enjoy the ride back to $200 billion. You guys buy all the MBIA and AIG you want. I'll stick to buying JNJ, PG, and MO and in a decade we'll see who comes out ahead.

  • Report this Comment On July 21, 2010, at 10:26 AM, TMFBomb wrote:

    @yaiwolf,

    Fair enough. Sometimes colorful language hits, and sometimes it doesn't. :)

    @financeguy85,

    It's not that $5 billion could turn into $200 billion (the govovernment loans need to be added to the $5 billion for a fairer comparison). It's that if AIG is able to pay back its government loans, the $5 billion market cap is in a position to go up by multiples.

    I'm not going to pretend to know exactly what's on AIG's balance sheet. Like the big banks, it's a bit of a black box. Rather, AIG is a speculative play that seems to pay off x:1. The question you have to answer for yourself is whether those odds make the speculation worth it for you. This is in a completely different bucket than JNJ, PG, and MO.

    -Anand

  • Report this Comment On July 22, 2010, at 9:27 AM, WhiteHatBobby wrote:

    Ford took $5.9 billion in taxpayer loans from an "energy" law that Pelosi, Reid, & Co. passed in 2007 and works with Obama on pushing tiny and electric cars while opponents were seized for political favours (supporting Mitt Romney).

    This new financial law is intended to reward contributors to the DNC.

  • Report this Comment On July 23, 2010, at 3:26 PM, JazzVancouver wrote:

    It seems to me AIG's stock price has tripled in value over the last 12 months. The potential gains may already be realized?

  • Report this Comment On July 23, 2010, at 4:39 PM, humbledutch wrote:

    @faultytriangle

    I tried to find the tickers of the convertible preferred stock of AIG and ABK but can't find them.

    Want to help me out on this?

  • Report this Comment On July 23, 2010, at 11:08 PM, doncoyoteok wrote:

    You never know. The government may reset the rules so that these companies are worth a ton of money. Or they may reset the rules so they are worth nothing. I have no pipeline into government information so it would be like throwing the dice and hoping they come up 7.

  • Report this Comment On July 23, 2010, at 11:17 PM, weihou258 wrote:

    If he is wrong, he may till have millions/billions left. Why gambling on AIG? If you buy big position, you may lose a lot. If you buy a little, will not make much.

    I have my own way to bet on the risk stocks. Use $100, can buy 10,000 shares on a penny stock. $1000 can buy 10 stocks. Just assume i do not have that thousand dollars. Check result 10 years later.

  • Report this Comment On July 24, 2010, at 12:40 PM, GrumpyGopher wrote:

    I think AIG is a big gamble still. Ten years is too long a time frame for my resources. I usually target 1-3 years. I got F under 5 and sold at 13, its going to hang around there for the next couple years, until we get unemployment under 6%.

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