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Ambac Financial Group, Inc. (AMBC): Hedge Funds In Wait-and-See Mode

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of Ambac Financial Group, Inc. (NYSE:AMBC).

Hedge fund interest in Ambac Financial Group, Inc. (NYSE:AMBC) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AMBC to other stocks including Collegium Pharmaceutical Inc (NASDAQ:COLL), AVROBIO, Inc. (NASDAQ:AVRO), and Big Lots, Inc. (NYSE:BIG) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Michael Hintze CQS Capital

Michael Hintze of CQS Cayman LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, blockchain technology’s influence will go beyond online payments. So, we are checking out this futurist’s moonshot opportunities in tech stocks. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a glance at the new hedge fund action regarding Ambac Financial Group, Inc. (NYSE:AMBC).

What does smart money think about Ambac Financial Group, Inc. (NYSE:AMBC)?

At Q1’s end, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AMBC over the last 18 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

More specifically, EJF Capital was the largest shareholder of Ambac Financial Group, Inc. (NYSE:AMBC), with a stake worth $25.3 million reported as of the end of September. Trailing EJF Capital was CQS Cayman LP, which amassed a stake valued at $4.9 million. Raging Capital Management, Tontine Asset Management, and Alyeska Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position EJF Capital allocated the biggest weight to Ambac Financial Group, Inc. (NYSE:AMBC), around 5.32% of its 13F portfolio. Raging Capital Management is also relatively very bullish on the stock, earmarking 3.4 percent of its 13F equity portfolio to AMBC.

Due to the fact that Ambac Financial Group, Inc. (NYSE:AMBC) has witnessed declining sentiment from the smart money, it’s safe to say that there were a few money managers that decided to sell off their full holdings by the end of the first quarter. Interestingly, Nancy Zimmerman and Gabriel Sunshine’s Bracebridge Capital cut the biggest investment of the “upper crust” of funds watched by Insider Monkey, worth about $4 million in stock, and Israel Englander’s Millennium Management was right behind this move, as the fund sold off about $1 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ambac Financial Group, Inc. (NYSE:AMBC) but similarly valued. These stocks are Collegium Pharmaceutical Inc (NASDAQ:COLL), AVROBIO, Inc. (NASDAQ:AVRO), Big Lots, Inc. (NYSE:BIG), and Portola Pharmaceuticals Inc (NASDAQ:PTLA). This group of stocks’ market values are similar to AMBC’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
COLL 21 170373 2
AVRO 17 168056 3
BIG 15 75414 -9
PTLA 17 61104 -10
Average 17.5 118737 -3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $119 million. That figure was $51 million in AMBC’s case. Collegium Pharmaceutical Inc (NASDAQ:COLL) is the most popular stock in this table. On the other hand Big Lots, Inc. (NYSE:BIG) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Ambac Financial Group, Inc. (NYSE:AMBC) is even less popular than BIG. Hedge funds dodged a bullet by taking a bearish stance towards AMBC. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th but managed to beat the market by 16.8 percentage points. Unfortunately AMBC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); AMBC investors were disappointed as the stock returned 17.7% during the second quarter (through June 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.