Among the biggest losers in Tuesday's early trading are Ambac Financial (NYSE: ABK), Fidelity National Info (NYSE: FIS) and Netease.com (Nasdaq: NTES).

Ambac’s Pain Spells Opportunity for Rival

As we noted a week ago, bond insurer MBIA (NYSE: MBI) is on the ropes, creating an opportunity for rival Assured Guaranty (NYSE: AGO). Investors failed to heed that advice, as AGO’s shares have fallen roughly -10% since then. Well, another data point just underscored the bullish investment thesis for AGO.

Rival Ambac Financial (NYSE: ABK) has also just released very weak results, pushing its shares down -13.7% in early trading. Ambac and MBIA are both hemorrhaging cash, which is impeding their ability to underwrite new business. Ambac now has just $160 million in statutory surplus funds (which measures the amount of capital above state-regulated minimums). That’s down from $801 million a year ago. Since it is unclear when Ambac will start making money, the financial firm will likely need to tap fresh sources of capital to stay above the regulatory minimums. Only when Ambac is truly generating profits will it be able to start competing for new business. Until then, Assured Guaranty is operating without much competition.

Action to Take --> Steer clear of MBIA and Ambac, and stick with shares of the industry’s only strong player. Shares of Assured Guaranty trade for less than tangible book value, and around six times projected 2010 profits of around $2.65. (The current consensus of $2.91 a share is likely to drop in coming weeks to reflect recent first quarter results).

Fidelity, Your Bluff has Been Called

Shares of Fidelity National Information Services (NYSE: FIS) are off -4% after the Blackstone Group (NYSE: BX) called Fidelity’s bluff. Blackstone wanted to buy Fidelity for $32 a share, but Fidelity wanted a much higher offer. Blackstone issued a terse “no thanks” and walked away. That’s probably a wise move for Blackstone, which had lost roughly $1 billion in market value since rumors of the deal started to circulate. A Blackstone-led consortium would have needed to borrow nearly $10 billion to pay for Fidelity, which is a leading processor of financial transactions.

Could these two firms sit down again and re-visit buyout talks? Not likely. Each side has issued fairly acrimonious statements about their version of events. And few other buyers are capable of swallowing such a large deal. And even the ones that have that financial muscle might likely invite anti-trust concerns by acquiring Fidelity, the largest financial middleman to all major institutions.

Blackstone may look to go after one of Fidelity National’s smaller rivals such as Fiserv (Nasdaq: FISV), Global Payments (NYSE: GPN), Jack Henry (Nasdaq: JKHY), or Total Systems Service (NYSE: TSS), all of which could be had for less than half the cost of Fidelity National.

Action to Take --> Put Fidelity National on your radar, but take no action. If investors come to believe that buyout talks are truly dead, shares could drift back to the lower $20s, at which point they’d again be attractive on a fundamental basis.

Another Chinese Gamer Swoons

In recent sessions, we’ve been talking about the plethora of Chinese video gaming stocks that are approaching 52-week lows, even as they already sport very low price-to-earnings ratios (P/E) and pristine balance sheets. Add Netease.com (Nasdaq: NTES) to the list. Shares are off -5.5% this morning, and have fallen roughly -25% since mid-March. The stock is now in single-digit P/E territory based on projected 2011 profits. And if you exclude the company’s $1 billion cash balance, shares trade closer to seven times profits, on an enterprise value basis.

Netease.com, along with Shanda Games (Nasdaq: GAME) and Perfect World (Nasdaq: PWRD), are suffering from a perception that Chinese consumers are starting to lose interest in video games. This concern arises every few years when the industry hits a temporary slowdown. Even if current growth forecasts are too high and need to come down, this industry still offers a compelling blend of growth and value.

Action to Take --> Give a close listen to Netease.com’s conference call on Wednesday to glean insights into the industry’s broader health. If management re-affirms full-year guidance, then you may want to build a position in the stock while it's near its 52-week low.

-- David Sterman

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