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Technically, Ambac Financial Is a Buy

By Jeremy Phillips - Updated Apr 6, 2017 at 12:20PM

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Assuming you pay attention to lines on a graph.

Technically, you should buy Ambac Financial (NYSE: ABK) right now.

We examined the company using Moving Average Convergence-Divergence (MACD), one of the most popular and long-used technical analysis indicators.  Technical analysis is the field of buying and selling stocks based not on the underlying merits of a company, but rather on the patterns and formulas around its price movements.

Signal line crossover is one of the more common ways to interpret MACD. It uses a series of moving averages (in this case, nine, 12, and 26 days) to look for bullish and bearish crossovers that indicate a stock has momentum in one direction or another. Below, you can find a current chart of Ambac Financial's MACD profile:

Confused? Well, that's preposterous! How could you ever be confused by something as simplistic as a Moving Average Convergence-Divergence chart! OK, we're jesting -- but in all seriousness, this is actually one of the simpler methods for technical analysis.

Still, if you'd strictly followed the rules, seeking out upward and downward momentum, you would have seen the stock move between buy and sell categories a fantastic 16 times!

A better way to size up companies
Here at, we're more interested in other measures of company value. When we look at Ambac Financial and its peers, here are the areas that interest us:


Ambac Financial

Markel (NYSE: MKL)

Erie Indemnity (Nasdaq: ERIE)

Market Cap (millions):




Annual Revenue Growth:




Revenue (TTM, millions):




Operating Margin (TTM):




P/E (TTM):




Source: CapitalIQ, a division of Standard and Poor's; TTM = trailing 12 months.

We prefer to look at the fundamental drivers of value. Investors should closely watch statistical fields like return on equity, as well as qualitative values like competitive advantage and managerial effectiveness. These areas led investors like Warren Buffett and Seth Klarman to decades of outperformance. Buying and holding great companies is the best way for individual investors to build lasting wealth and achieve their financial goals.

So when you look at Ambac Financial, don't evaluate it for crossing a momentum line.  Buy or sell it because:

  • Ambac used to provide insurance and credit enhancement products for bonds. Over the decades, the company built up a stellar reputation, and had what many admirers considered an ironclad balance sheet. However, as the housing crisis hit, it became clear how far Ambac had deviated from its traditional bond-insurance strengths into new fields like mortgage-backed securities. Ambac no longer has the ability to write insurance, because of its high probability of default . Today, the company merely exists to collect premiums from old policies while paying out continuing insurance claims.
  • As colleague Morgan Housel points out, Ambac is now merely a holding company. Any real value is derived from an operating entity called Ambac Assurance that pays dividends to the holding company for debt servicing and dividends to shareholders. However, due to recent court rulings, the ability of Ambac Assurance to pay dividends back to the holding company is in doubt. Even under favorable conditions, Ambac shareholders might be toast.
  • While Ambac's operating structure and balance sheet are nearly impossible to understand, given the complexity of securities insured and the changing accounting standards, the base measures for the company don't look good. In the first quarter, net premiums earned fell 36% from the previous year.

Want to buy Ambac Financial based on technical merits today? Technically, odds are that you should flip and sell Ambac Financial sometime very soon. If that sounds like madness to you, well, we here at the agree. In every market decline, technical analysis gets its share of proponents. The cries that "buy-and-hold is dead!" get louder, and individuals race toward schemes that promise greater wealth in a shorter amount of time.

I don't deny that technical analysis could make investors money. In any random short-term transaction, you're essentially playing a 50/50 game of chance. However, at the same time, most technical analysis schemes are a relatively simple science, eliminating the vast complexities of evaluating true company value. However attractive, this theory is ultimately the wrong path for individual investors.  Technical analysis relies on long-held beliefs about exploiting momentum and consistent patterns throughout the market.

However, with as much as 75% of market trading now done by Ph.D-level programmers at massive high-frequency funds, even if opportunities existed, what chance would an individual have to sniff these deals out? With so much volume now driven by these funds, how can you be certain the same rules of patterns still even exist?

I could also point to Massey University's study across 49 countries, which showed that more than 5,000 trading rules add no value.  However, the real reason to forget about technical investing is what we mentioned earlier:  Ambac Financial crossed the crossover 16 times across the past year!  While traders might not buy and sell with each crossing, cases of high momentum are normally short lived. The amount of trading in most technical analysis schemes racks up commission fees and short-term capital gains taxes, eating away at profits.  More importantly, it takes away from the idea of holding a portfolio of great companies that can accrue wealth over a long time horizon.

That's why, at, we recommend that individual investors establish a portfolio of well-managed companies with strong advantages over their competitors. In the end, we find that to be the best contributor to long-term wealth. More importantly, it'll spare you from sitting bleary-eyed in front of a computer with a Big Gulp full of coffee, frantically buying in and out of companies. But hey, if your idea of protecting your future is charting the ups and downs of Moving Average Convergence-Divergence charts, then Ambac Financial looks like a buy right now. Just don't expect to hold it for very long.

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Jeremy Phillips owns shares of no companies listed above. Markel is a Motley Fool Inside Value pick. The Fool owns shares of Markel. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Markel Corporation Stock Quote
Markel Corporation
$1,249.25 (-1.78%) $-22.64
Erie Indemnity Company Stock Quote
Erie Indemnity Company
$221.06 (-0.31%) $0.69

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