Why Ambac Financial Group Stock Is Getting Crushed Today

By Rich SmithMarketsFool.com

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What happened

Ambac Financial Group (NASDAQ: AMBC) shares got crushed Monday morning, falling as much as 19.2% in early trading before recovering slightly to adecline amounting to about 15.1% as of 12:30 p.m. EST.

So what

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A big downgrade from analysts at MKM Partners is to blame for Ambac's tumble. MKM's analysts are having "great difficulties assessing an appropriate value" for Ambac -- but the firm's best guess is that the stock is worth a whole lot less than the $22 and change it currently sells for.

As explained in a write-up on StreetInsider.com this morning, MKM's thinking goes like this: Similar companies such as Syncora, MBIA (NYSE: MBI), and Assured Guaranty (NYSE: AGO) sell for valuations ranging from 23% to at most 57% of their adjusted book values (ABV). MKM isn't sure whether Ambac is a significantly better shop than these rivals, but just to be safe, it's erring on the side of caution and assuming the stock is worth at most 30% of its ABV.

That works out to a price of about $10 a share, says MKM. And this estimate is so far below where Ambac stock trades today, that the firm believes it makes the stock a sell.

Now what

Ambac says its business today is "executing the following key strategies: active runoff of AAC and its subsidiaries through accretive transaction terminations, policy commutations, settlements and restructurings, and maximizing the risk-adjusted return on invested assets; loss recovery through litigation and exercise of contractual and legal rights; improved cost effectiveness and efficiency of the operating platform; rationalization of AAC's capital and liability structures, enabling simplification of corporate governance and facilitating the successful rehabilitation of the Segregated Account; and selective business transactions offering attractive risk adjusted returns that, among other things, may permit utilization of Ambac's tax net operating loss carry-forwards."

If you understand all of that, and feel you have a better grasp of Ambac's "appropriate value" than MKM has -- and if you think the stock is a bargain at $22 a share -- then maybe now is a great time for you to buy. On the other hand, if any of the above confuses you, you may be better off following MKM's advice, and following the lead of Ambac CEO Nader Tavakoli, who himself jumped ship and abandoned Ambac stock last week.

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Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 346 out of more than 75,000 rated members.

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