Filed under: Major movement, Bad news, S and P 500, Housing
In this series, we take a look at the 25 stocks on the S&P 500 Index (SPX) that have turned in the worst performance during the past decade — what went wrong, and what happens next.
The No. 1 and No. 2 spots on our underperformers’ list both belong to bond insurers. Along with MBIA Inc. (NYSE: MBI), Ambac Financial Group (NYSE: ABK) has been battered bloody during the past 12 months. Prior to that, the security was riding high on a years-long uptrend, before some of its more unsavory investments came to light amid the subprime crisis.
What went wrong? At No. 1 on our list of SPX losers, ABK lost a staggering 97% of its value during the 10-year period that concluded on June 30, 2008. From its May 2007 peak of $96.10, ABK is down 98%.
Ambac’s story is not too different from that of MBIA. The company enjoyed triple-A ratings, even as its portfolio grew increasingly more risky under the weight of subprime-linked debt. As of December 2007, no insurer was more exposed to bad mortgage debt than Ambac — the company insured $22 billion of subprime mortgage debt, nearly double the exposure of MBIA.
Bond insurers endured another fundamental slap last December. With ratings agencies warning of possible downgrades across the sector, ABK’s stock was already trading near 10-year lows. Enter Warren Buffett, who announced that his Berkshire Hathaway would launch its own bond-insurance business. The specter of heightened competition from a company not plagued by bad subprime debts was an effective dash of salt on ABK’s wounds.
It wasn’t the last time bond insurers would hear from Buffett. Last February, the billionaire investor said he offered to reinsure $800 million in municipal bond portfolios for Ambac, MBIA, and the Financial Guaranty Insurance Company.
It may have seemed like a white-knight move at first, but Buffett didn’t become the world’s most revered investor by shouldering risky debt. As part of the deal, Berkshire Hathaway stated its offer didn’t extend to any collateralized debt obligations or mortgage-related securities. Essentially, Buffett was offering to strip the bond insurers of their least-risky investments, leaving them with only the most seriously infected assets in their portfolios. Not one of the trio accepted the apparent bailout offer.
Meanwhile, Ambac was busy trying to defend its precious triple-A rating. Without this key endorsement, the company’s already bleak prospects would likely deteriorate further. On March 7, the firm said it had successfully raised $1.5 billion in capital. Regardless, Moody’s threatened in June to lower its ratings on ABK.
What next? Speak about a grand finale — Ambac Financial was officially booted from the S&P 500 Index in June. Newcomer Lorillard (NYSE: LO) served as the bond insurer’s replacement. Shortly thereafter, Moody’s downgraded the company, while Fitch withdrew its ratings. (Standard & Poor’s is expected to conclude its review of both ABK and MBIA by the end of August.) As a result, Ambac was forced to terminate $270 million in business and increase its collateral requirements by just over half a billion dollars.
As an indication of how dire the stock’s situation is, S&P Equity Research recently raised its price target on ABK to $2 per share. In its upcoming earnings report, slated for August 6, analysts anticipate Ambac to admit a per-share operating loss of $1.26.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer’s Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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