NEW YORK ( TheStreet) --Investing in MBIA (MBI - Get Report), which will report third quarter earnings after Wednesday's close, is essentially a bet Bank of America (BAC - Get Report) will be forced to pay at least $2 billion to settle a lawsuit brought by the monoline bond insurer over bad mortgages underwritten ahead of the 2008 subprime crisis.
That bet has cheapened by about 12% since Oct. 17 and BTIG analyst Mark Palmer, who has been bullish on MBIA for several months, sees no meaningful reason for the selloff.
"We've seen a number of different high-beta financials trade off during the past couple of weeks, and MBIA is in that category," Palmer wrote in an email exchange following Friday's close. "When the market is selling off, some funds looking to raise cash will punt the names that are nice options to have, but not necessarily core to their portfolios. Again, MBIA is in this category," Palmer added.
Palmer has also observed that MBIA "tends to underperform as its earnings release approaches. Most of the developments that would be positive for MBIA occur between the earnings releases."The analyst sees "not a lot of upside in the earnings release, but some potential downside." Therefore, he argues "investors lighten up on MBIA going into earnings and then look to buy it back once they see that the company has preserved its optionality." Getting in ahead of that trade offers significant gains, if the action surrounding MBIA's second quarter earnings release repeats itself this quarter. MBIA shares fell from $10.71 following the July 19 close to $8.76 at the Aug. 8 close. MBIA released earnings after that close, and opened the next day at $9.91--13.1% higher, once MBIA had, to borrow Palmer's formulation , "preserved its optionality." The shares closed at $10.41 two full trading days after the release--a gain of 18.8%. They reached a recent high of $12 on Sept. 14 Now, going into third quarter earnings, the shares are back down at $9.72. If MBIA suddenly shows after Wednesday's close that it may not be able to hold out to keep fighting with Bank of America, the downside would likely be severe--possibly as much as 90%. It is more likely, however, that MBIA will show it is still in the fight. At least that's what Palmer believes and what Morningstar Fund Manager of the Decade Bruce Berkowitz is betting . Whether or not you want to make that bet, it sure looks better at $9.72 than it did at $12. -- Written by Dan Freed in New York. Follow @dan_freed