At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
The financial crisis is over! Hurray!
Two years after Warren Buffett declared the Great Recession "over" -- and just a little more than a year after the National Bureau of Economic Research made it official -- investors are finally getting comfortable returning to the market.
The Dow Jones Industrial Average (INDEX: ^DJI) , while still pretty erratic, seems intent on ending the year with a small gain, for one thing. For another, Citigroup-nag Meredith Whitney appears to have been wrong (or at least very early) in predicting "hundreds of billions" worth of defaults by U.S. state, county, and local governments. To top it all off, yesterday, one big investor argued that it's finally safe for investors to venture back into the market for guaranteeing municipal bonds.
Everybody, back in the pool!
Actually, more than just safe. If you ask New York-based institutional broker BTIG, investing in bond insurers like Assured Guaranty (NYS: AGO) and MBIA (NYS: MBI) could be downright profitable. Initiating coverage of Assured Guaranty on Monday, BTIG argued that the stock is "deeply undervalued at current trading levels."
According to the analyst, "fears" -- such as the losses Whitney predicted -- "have depressed [Assured Guaranty's] share price." But over time, these fears will "abate and the viability of its business model [will become] more apparent." Just as soon as investors "appreciate that Assured's risk profile is overstated, and that its ability to generate profitable new business is understated," the chance to "realize outsized returns" will return.
Small price, big returns?
BTIG may have a point. I mean, there's no denying that Assured's share price looks cheap. The stock only costs about 4.1 times forward earnings and has debt roughly equal to cash. That stands in marked contrast to the negative P/E ratios at Radian Group (NYS: RDN) and MBIA, which are both losing money and burning cash. Moreover, MBIA has over $14 billion in total debt on its balance sheet against just $1.24 billion in cash. And if you compare Assured to its other traditional rival in the municipal bond insurance market -- Berkshire Hathaway (NYS: BRK.A) -- Assured looks much, much cheaper than the near-17 P/E on Berkshire.
But could it be...
Cheap for a reason?
After all, even BITG acknowledges there are certain "headwinds" facing Assured Guaranty: "weakness in the U.S. municipal bond market and the budgetary pressures facing insured municipalities, residual RMBS positions, and exposure to troubled Eurozone countries ... not inconsequential."
I'll say. In fact, these worries were so "consequential" as to scare Buffett and Berkshire right out of the municipal bond insurance market last year. As I wrote at the time:
In 2009, Berkshire only insured $40 million in new muni bond issues versus a whopping $595 million in 2008. So if you were wondering why you're hearing how so much state and municipal debt has been "sold short" by way of credit default swaps in recent months, then you have an answer: Investors think munis are going down.
Buffett leads, and everyone follows
Now ordinarily I consider Buffett a leading indicator -- as in, wherever Buffett leads, that indicates the direction you should go, too. But the world of finance has been acting awfully funny of late, and this has me wondering if BTIG might be on to something.
Consider: When the Assured-guaranteed city of Harrisburg declared bankruptcy in October, that worried me. But just last week, a federal bankruptcy court declared Harrisburg's filing invalid, and abracadabra, Harrisburg wasn't bankrupt anymore -- and Assured was off the hook for its debt.
Just a couple weeks before that, the heavily indebted Alabaman county of Jefferson was also looking at a bankruptcy filing. But in a move to avert it, bankers Regions Financial (NYS: RF) , JPMorgan Chase (NYS: JPM) , and others got together and agreed to write off $1.2 billion. Now, the county decided to file anyway, but if they hadn't, that would have been $1.2 billion worth of worry off the mind of whoever had guaranteed the debt. And don't even get me started on the 50% "haircut" that bankers granted Greece in October...
From Alabama to Albania, all around the globe we're seeing bankers voluntarily write down the debts of their debtors -- with no default required, and, at least arguably in some cases, no default insurance kicking in. I don't pretend to understand the logic behind these actions, but they do appear to lessen the risk of investing in a bond insurer like Assured Guaranty.
Maybe, just maybe, BTIG is on to something here. Maybe, just maybe... Assured Guaranty is as cheap as it looks.
Not quite ready to gamble on a "maybe"? Can't say I blame you. Why not try a few steady-eddy dividend payers instead? Read the Fool's new, and free, report: "13 High-Yielding Stocks to Buy Today."
At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 336 out of more than 180,000 members. The Motley Foolhas adisclosure policy.The Motley Fool owns shares of Berkshire Hathaway and JPMorgan Chase.Motley Fool newsletter serviceshave recommended buying shares of Berkshire Hathaway.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.
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