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For 25 years, Steven Halpern, editor of TheStockAdvisors.com, has surveyed the leading financial newsletter advisors asking for their favorite stocks for the coming year. This article is one of 100+ ideas in the Best Stocks for 2008 report.
"Ambac Financial Group (NYSE: ABK) is my top high-risk speculation for 2008," says Kelley Wright, editor of Investment QualityTrends. "The company is the second largest municipal bond insurer and a major player in other types of financial guarantees and investment management services.
"Ambac primarily insures newly issued bonds, which guarantees payment of principal and interest to the bond insured. Of more concern to Wall Street, however, is the Specialized Finance division, which has significant exposure to the structured, asset-backed and mortgage-backed finance markets in the US and abroad.
"ABK shares have fallen dramatically, down as much as 70% year to date. This decline is due to investor concerns that losses on credit derivatives tied to residential mortgages and related obligations will deplete ABK's capital base to the point where the company will have to raise additional (and most likely dilutive) capital to maintain its top-tier financial strength rating.
"ABK's valuation is at a historically low level given the market turmoil, headline risk and likelihood of rising loss costs and mark-to-market write-down's stemming from the subprime mortgage situation. Ironically, a widening of credit spreads and reduced investor appetite for risk could actually increase demand for ABK's products over the longer term.
"The primary risks for ABK are a higher than anticipated rise in interest rates, a further deterioration in credit quality, and the potential need to raise additional capital. If ABK can manage to maintain its top-tier financial strength rating without raising additional capital, the low level of valuation compared to its peers and historical averages offers significant upside potential.
"The company currently has the Standard & Poor's Quality Ranking of A+ and the IQ Trends rating for outstanding dividend growth. Investors should note the high risk. If it doesn't work out, this could be a crash-and-burn pick. However, if this stock does works out, it could be a home run."
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