Ambac Financial Group (ABK) has been in the news plenty recently. The stock was down 93.5% from its high close on 5/18 to its low on 1/18. It closed up 120% from that low on Wednesday, January 23rd, but how significant is that really for a stock at $80 six months ago?
The stock had been down about 35% between May and August of last year. Holders of the stock were faced with a difficult decision: At what point do you cut your losses? or can you afford to hang on and wait? In many cases investors find it useful to look at analyst ratings for guidance and ideas. The chart below highlights Citigroup's recommendations for ABK since they began coverage of the stock in August of 2006. The blue line represents the price target, and the red dots highlight each reiteration of the rating and changes in the price target.
Click to enlarge:
As shown, the analyst maintained a "Buy" rating on the stock throughout the 90% decline. Throughout the decline the price target was reduced from $103 to $18 (-82.5%), and yet the "Buy" rating was maintained. The stock was downgraded to "Hold" on 1/18, at the low close.
Our intent here is not to harp on Citigroup, or implicate them as bad analysts, this is only one example of a host of bad calls made by many firms. The point we make is that even professionals get it wrong.