Citi Analyst on Ambac Got It Way Wrong

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.

Comments

[helplessobserver]

Has anyone ever seen an analyst who knows what is going on? Early in my investing I learned a costly lesson, if MER is recommending a stock, it is a good short - why, because their recommendation was designed to pump up the stock price to get more investment banking business from the company. Sell recommendations never crossed the lips of any MER analyst or broker I ever dealt with. Stock prices follow trends so a chart is worth a thousand earnings forecasts. If your favorite is crashing, get out, or you will be road kill like the long term investors in the monolines. Just an opinion, not a sermon.

[Victhom]

Private equity companies, including TPG Inc., value investors such as Wilbur Ross and asset management firms are considering launching new bond insurance companies rather than invest in the existing ones, the Financial Times reported Friday.
The FT said such a move could hamper efforts to aid troubled incumbents such as Ambac Financial Group Inc. and MBIA Inc.
Private equity executives say with total exposure becoming impossible to calculate, it is more attractive to start a new enterprise than to invest in existing firms, according to the FT. See full story
Greg Morcroft is MarketWatch's financial editor in New York.

[ErnieMontague]

Many of the large houses will initiate a buy on a stock they are selling. No loyalty or honesty in that business.

[Gary McCamey]

I read this article and for one reason mainly. It mentioned Citigroup, and their analyst. I tell you, Citigroup is as bad a company as I've ever seen. This shows what I mean, this article. They are recommending a buy, and it's going down like crazy. Once it hit a low, well, logically then it could be a buy, and many people bought at a low and made a fortune. I suppose Citi had a sell on it at that point. It seems so likely Citi Analyst are not thinking of the buyers and sellers of these companies, but are trying to manipulate stocks by telling people to do the opposite of what they should do. Why? I suppose they are manipulating the stocks by giving bad analyst report to enable themselves to profit on these companies. Shame on them. Maybe this is not written very well, but I've done the opposite of what Citi has said to do and I've made a lot of money by so doing. When this is all over, I hope people remember Citigroup's clumsy efforts to manipulate stocks. When Citi analyst said to sell Etrade, I watched and bought doing opposite their advice. I bought about $37,000. worth of ETrade using my margin, and made over $13,000. in less then a month. I did this while, 'Bullwinkle', Bahalia, their inapt analyst was saying to sell ETrade for it was going bankrupt. Thanks Bullwinkle, that's almost exactly what I make a year on Social Security. Keep looking at your crystal ball and telling me what to do, so I can do just the opposite. My warning, stay away from Citigroup, as any company so wrong, well, I'd hate to have anything to do with them. Capt.