This Political Speculation Could Add Up to Big Gains
This week, we're spotlighting two Top Stocks: the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FMCC).
Better known as Fannie Mae and Freddie Mac, these companies are unlike any other.
They're what's called government-sponsored enterprises ("GSEs"). They guarantee high-quality mortgages with an implicit backstop from the U.S. government. That means the government will step in to prevent default, if necessary.
They're the only companies in the country with this business model.
But here's the thing...
When Fannie Mae and Freddie Mac needed a bailout during the 2008 global financial crisis, the government stepped in... and never really stepped out. It has held the businesses in conservatorship ever since – even though they've paid back the bailout funds and are now profitable.
With the government still running the show, Fannie Mae and Freddie Mac have been stuck in financial and legal limbo.
That uncertainty has been tough on investors. They can't tell what these businesses are worth until the government works out its next steps.
President Donald Trump is keen on getting Fannie Mae and Freddie Mac out from under the government's thumb. And most of his plans would lead to a lot of value for shareholders.
You can see shares of Fannie Mae and Freddie Mac soared with Trump's election in November 2024. But they waned as he got distracted by tariffs and Iran...
I recently sat down with Whitney Tilson, former hedge-fund manager and current editor of Stansberry's Investment Advisory, to work through what's happening here.
(Whitney's also college friends with Bill Ackman, head of Pershing Square Capital Management and one of the leading activist investors trying to get the government to let Fannie Mae and Freddie Mac free.)
As we cover, these are two of the greatest businesses of all time. And if they were independent companies, like Trump is hoping to make them, they would be worth five times what they are today...
Three Big Ideas About Fannie Mae and Freddie Mac
The Greatest Businesses You're Not Allowed to Own
Fannie Mae and Freddie Mac are two of the most profitable companies on the planet.
And their business model is fairly simple...
They buy mortgages from large and small banks... package them as mortgage-backed securities... sell them to investors... and then guarantee them (against default) for a fee.
That puts them at the center of the world's largest debt market, with about $7.8 trillion in guaranteed mortgages.
Over the past two decades, their "guarantee fee" has risen from 20 basis points (or about 0.20%) to 65 basis points (0.65%) today.
These businesses were great before the financial crisis. Now they're minting money.
Together, they earned about $25 billion in net income last year.
But here's the catch... Fannie Mae and Freddie Mac only trade over the counter. And the U.S. government owns 80% of these companies through senior preferred shares and warrants.
There's a movement happening to try and turn ownership of Fannie Mae and Freddie Mac over to shareholders via an initial public offering ("IPO"). But there are complications...
On top of the government's $365 billion in senior preferred shares, there are also high capital-reserve requirements these GSEs must meet (more on that in a moment), as well as other legal hurdles.
Still, put a conservative 12 times earnings multiple on the combined businesses, and you get an overall market capitalization of around $300 billion.
This Is a Political Speculation – Not an Economic One
Forget the income statement.
The real question with Fannie Mae and Freddie Mac isn't how strong the business is... It's what the Trump administration decides to do with its few hundred billion dollars' worth of government claims.
Again, it has $365 billion in senior preferred shares.
It could release Fannie Mae and Freddie Mac from conservatorship and cancel them. After all, the bailout – which totaled about $190 billion – has been paid back with interest. (So far, the government has collected roughly $300 billion from Fannie Mae and Freddie Mac.)
However, the government could also end the conservatorship and not cancel the preferred shares. And if it does that, then public shareholders won't be left with much value. That's a risk.
There are two other big variables to consider as well...
First, there's the capital-reserve requirement. Right now, regulators demand Fannie Mae and Freddie Mac have reserve levels at 4%. Against $7.8 trillion in mortgage guarantees, that's more than $300 billion.
The GSEs only have $179 billion in reserves right now. That means they'd have to find more capital to build up their balance sheet – and that would hurt existing shareholders.
Of course, the Federal Housing Finance Agency, run by Trump appointee Bill Pulte, can lower that threshold to 2.5% without a single vote in Congress. That would increase these businesses' profitability (and the value left over for shareholders).
Next, there's Fannie Mae and Freddie Mac's junior preferred shares. Many of these shares trade at a discount to common stock. And whether they get a haircut or convert at par changes the math for common shareholders, too. This is similar to the decision on the senior preferred shares, but on a smaller scale.
Every one of these decisions is political, not economic. That's exactly what makes this trade so unusual – and so hard to model.
According to Bill Ackman, solving all three of these problems would clear the path for shareholders and push the stocks, which each trade around $6 or $7 today, to more than $30 per share – a roughly 350% gain.
That means these stocks may be worth five times what they trade at today.
Size These Businesses Like a Lottery Ticket With Good Odds
The risk-reward setup here is striking.
At roughly $7 a share, Whitney estimates the downside to be about $2. That's where he sees the stocks if the Trump administration walks away and punts this issue to the next president.
The upside, depending on how the senior preferred shares and reserve decisions shake out, is anywhere from a double to a five-bagger. Best case, you're looking at Fannie Mae and Freddie Mac trading around $30 to $33 per share.
But these aren't stocks you load up on. If you choose to invest in these GSEs, Whitney recommends allocating just 1% of your portfolio to them, maybe 2%.
The volatility is extreme. Bill Ackman tweeted that Fannie Mae's stock had 10 times upside, and it ripped 40% to 50% in two days. But that can work in reverse, too.
As Whitney put it, if you could own one of the world's greatest businesses at just 2 times earnings, you'd buy it all day long.
The question is how much political baggage is sitting between you and that business.
Watch to Learn More
To hear more of my discussion with Whitney Tilson, check out today's Top Stocks video. We break down the odds (and opportunity) in the potential IPOs for Fannie Mae and Freddie Mac.
You can watch the entire episode on our YouTube page by clicking the image above. Be sure to like and subscribe to get more of our videos.
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Straight to the Source
- Bill Ackman's January 2025 pitch to recapitalize them, and an update from November
Until next week,
Matt Weinschenk
Publisher and Director of Research
What do you think about Top Stocks? Send any and all feedback to thisweek@stansberryresearch.com. We read every e-mail you send in.