Investors don't like uncertainty, and sell-side research on Ambac (AMBC +0.2%) is littered with phrases like "filled with uncertainty," or "wait until there is further clarity."
Therein lies the opportunity, says one trader, as this conventional wisdom has created an asymmetric risk/reward scenario of a "palatable" downside, and maybe a home run on the upside. "The complexity of the Ambac situation is clearly discouraging investors from the name and has, in our view, led to a substantial mis-valuation of the post-reorg equity ... The lack of clarity coming from Ambac’s management team is further depressing investor sentiment."
Ambac, he/she says, has substantially over-reserved for losses on insured RMBS, while going low on how much it might collect in litigation claims. The result is a reported book substantially below fair value. "With management’s compensation package on the verge of being finalized, we anticipate that improved transparency and positive commentary will help close the gap between market and intrinsic value."