Please ensure Javascript is enabled for purposes of website accessibility

Why Ambac Financial Group Stock Is Getting Crushed Today

By Rich Smith – Dec 19, 2016 at 12:36PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

An analyst firm has warned this stock is worth much less than meets the eye.

Image source: Getty Images.

What happened

Ambac Financial Group (AMBC 1.68%) shares got crushed Monday morning, falling as much as 19.2% in early trading before recovering slightly to a decline amounting to about 15.1%  as of 12:30 p.m. EST.

So what

A big downgrade from analysts at MKM Partners is to blame for Ambac's tumble. MKM's analysts are having "great difficulties assessing an appropriate value" for Ambac -- but the firm's best guess is that the stock is worth a whole lot less than the $22 and change it currently sells for.

As explained in a write-up on this morning, MKM's thinking goes like this: Similar companies such as Syncora, MBIA (MBI -0.33%), and Assured Guaranty (AGO 0.69%) sell for valuations ranging from 23% to at most 57% of their adjusted book values (ABV). MKM isn't sure whether Ambac is a significantly better shop than these rivals, but just to be safe, it's erring on the side of caution and assuming the stock is worth at most 30% of its ABV.

That works out to a price of about $10 a share, says MKM. And this estimate is so far below where Ambac stock trades today, that the firm believes it makes the stock a sell.

Now what

Ambac says  its business today is "executing the following key strategies: active runoff of AAC and its subsidiaries through accretive transaction terminations, policy commutations, settlements and restructurings, and maximizing the risk-adjusted return on invested assets; loss recovery through litigation and exercise of contractual and legal rights; improved cost effectiveness and efficiency of the operating platform; rationalization of AAC's capital and liability structures, enabling simplification of corporate governance and facilitating the successful rehabilitation of the Segregated Account; and selective business transactions offering attractive risk adjusted returns that, among other things, may permit utilization of Ambac's tax net operating loss carry-forwards."

If you understand all of that, and feel you have a better grasp of Ambac's "appropriate value" than MKM has -- and if you think the stock is a bargain at $22 a share -- then maybe now is a great time for you to buy. On the other hand, if any of the above confuses you, you may be better off following MKM's advice, and following the lead of Ambac CEO Nader Tavakoli, who himself jumped ship  and abandoned Ambac stock last week.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he currently ranks No. 346 out of more than 75,000 rated members.

The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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 has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ambac Financial Group, Inc. Stock Quote
Ambac Financial Group, Inc.
$12.75 (1.68%) $0.21
Assured Guaranty Ltd. Stock Quote
Assured Guaranty Ltd.
$48.45 (0.69%) $0.33
MBIA Inc. Stock Quote
$9.20 (-0.33%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.