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Should You Be Tempted To ‘Sell’ Ambac Financial Group (AMBC) Stock

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Anabatic Fund recently released its Q4 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -11.7% in 2020 (net of fees) compared to the S&P 500 Index which returned 16.3% in the same period. You should check out Anabatic Fund's top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the Q4 2020 Investor Letter, Anabatic Fund highlighted a few stocks and Ambac Financial Group Inc (NYSE:AMBC) is one of them. Ambac Financial Group Inc (NYSE:AMBC) provides financial guarantee products. In the last three months, Ambac Financial Group Inc (NYSE:AMBC) stock gained 18.9% and on January 27th it had a closing price of $14.85. Here is what Anabatic Fund said:

"We sold our shares in Ambac (AMBC) during 2020. The decision was based on concerns about the creditworthiness of many of the state and local entities whose bonds Ambac has insured. The Covid-19 pandemic brought severe pain to many debt issuers, and the ramifications are going to be felt for years to come. There is little room for widespread credit deterioration given the inherent leverage in Ambac’s insured portfolio. And Ambac’s problems don’t end there.

A major reason for owning shares in AMBC for all these years was the pending litigation against Countrywide and Bank of America. The details can be found in prior letters, but the short version is that Ambac is pursuing litigation that was substantively identical to litigation that was filed and settled by a peer insurer in 2013. (2013 also happens to be the year we made our initial investment in Ambac shares, shortly after the company emerged from bankruptcy.)

In keeping with the stark divide between winners and losers in the pandemic, Ambac lost again on this front. The Countrywide trial, originally scheduled for the spring of 2020, was delayed as the pandemic set in. As the February 2021 trial date approached and looked unrealistic, it was postponed again, this time indefinitely. The trial or preceding settlement should happen...at some point. But the potential gain from a settlement or jury award and the ticking statutory interest are not enough, in my opinion, to offset the increased credit risk and our opportunity cost in holding the shares. Even if the litigation were to be settled tomorrow and the company were sold at a premium to Assured Guaranty – both outcomes I regard as likely at some point in the future – it is hard to argue that we are being adequately compensated for the risks in owning the shares between now and then. 39

In 2019 we did not buy or sell any AMBC shares and they appreciated by more than 25%. I wrote two years that 2019 would likely be the end of our Ambac investment, expecting at the time for the long-delayed Countrywide settlement to materialize. In the January 2020 letter I issued a partial mea culpa for the overoptimism on the timing. Noting that the trial had finally been scheduled, I added that I was “looking forward to writing the post-mortem on this idea…hopefully in our next letter.”

Unfortunately, that post-mortem has arrived on schedule but not with the results I expected. Ambac was not a successful investment, but the good news is that we realized a very small loss, selling the last of our shares at almost exactly the price we paid. The real burden comes in the opportunity cost. We would have been better owning many, many other assets during the years we owned Ambac shares. It was a small portion of the portfolio, but it was still a misallocation of time and resources on my part. The time spent was instructive in some helpful ways, but I should have been able to avoid relearning the main lesson – in cheap but lowquality companies time is not our friend. The shares were cheap when we bought them, cheap while we held them, and cheap when we sold them. Because the company was a slow-motion liquidation with a long tail of assets and liabilities, the value of the enterprise was stagnant (at best) over the years and did not keep up with any measure of opportunity cost."

Pixabay/Public Domain

In Q3 2020, the number of bullish hedge fund positions on Ambac Financial Group Inc (NYSE:AMBC) stock decreased by about 6% from the previous quarter (see the chart here), so a number of other hedge fund managers don't believe in Ambac's growth potential. Our calculations showed that Ambac Financial Group Inc (NYSE:AMBC) isn't ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 216% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 121 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

Disclosure: None. This article is originally published at Insider Monkey.