Stock Picks: ABK Up, TRLG Down

Battered bond insurer Ambac Financial Group (ABK) bounced big on Wednesday, fueled by a huge rebound in revenue from credit derivative swaps -- the same instruments that nearly destroyed the company eight months ago.

Swinging to a profit of $7.58 a share, Ambac reversed a net loss of $8.45 per share in the third quarter of 2008. The 39% spike in midday trading left shares above $1.50 for the first time since Oct. 1. Still, it’s hardly a return to complete health for the bond insurer. This past summer, the company set aside a massive $2.2 billion loss provision, which triggered an $833-a-share drop. In also scrapped plans for Everspan, a new bond insurance company that would have allowed it to write new bond insurance.

Sean Leonard, Ambac's chief financial officer, said on a Wednesday conference call that "the third quarter 2009 net income was driven by significant unrealized mark-to-market gains in our credit derivatives portfolio," an accounting shift that leaves the company in better shape by $2.87 billion, at least on paper.

The rest of Leonard's call detailed the many claims and settlement Ambac is trying to make as it cleans up is brutalized balance sheets.

The good news was tough for the many short-seller who banked on Ambac's fortunes worsening. As of Oct. 26, about 15.7% of its public share float was held short, according to ShortSqueeze.com. Its strong results forced those short sellers to unwind their positions as share prices rose.

Morningstar analyst Jim Ryan's assessment from August still seems like the clearest view of Ambac's condition, despite the spike in shares. "Without the ability to write business in the new company and with junk insured financial strength ratings, Ambac is effectively in runoff as it attempts to manage its existing capital to settle current and future claims on existing policies," he wrote.

Bottom Line: Sell
This has been a speculative play for some time, and this short squeeze offers a profitable exit point for a stock that's not really trading on fundamentals.

The fashion-stocks police busted True Religion Apparel (TRLG) on Tuesday after the maker of designer jeans missed Street earnings estimates. Shares were down 18% in midmorning trading.

The Vernon, Calif.-based apparel maker, whose most expensive jeans can sell for $300 a pair, reported earnings of 58 cents a share for the quarter, down 9% from 64 cents a share a year ago. Wall Street analysts on average expected a profit of 59 cents a share. Sales rose despite the one-penny miss, climbing to $82.4 million from $79.4 million, but short of analysts' $85 million estimate.

Chairman and CEO Jeff Lubell said on a Tuesday afternoon conference call that the company was raising its full-year profit guidance to a range of $1.82 to $1.86 a share, up from an earlier estimate of $1.76 to $1.84 a share. He touted the company’s performance, given current retail conditions and inventory controls.

Although Lazard downgraded the stock to Hold from Buy after the results, other analysts were more upbeat. Eric Beder at Brean Murray Carret & Co. said "the company took a major step forward by collapsing and taking control of its domestic sales network, which should offer material initial and future positives." He recommended buying on weakness.

Needham & Co. analyst Christine Chen said the company's transition to retailing from wholesaling would help growth as the recovery progresses. "The retail channel is driving sales growth, has higher margins, and enables
TRLG to better control pricing and is now 39.6% of sales vs. 27% last year," she wrote. "Long term, we expect TRLG to become more of a retailer than a wholesaler."

Bottom Line: Buy
The stock may be a better fit for investors than True Religion's fashion-forward jeans themselves.