Why We Won't Be Following Ackman on Fannie, Freddie

 | Jul 15, 2015 | 2:45 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

fmcc

,

fnma

The following artilcle was sent to subscribers of Stocks Under $10 at 2:17 p.m. ET.

Fannie Mae (FNMA) and Freddie Mac (FMCC) are each trading 7% higher today after investor Bill Ackman named the government-sponsored entities his two most interesting investments.

The comments came in an interview by our own Jim Cramer at the CNBC Institutional Investor Delivering Alpha conference in New York.

Fannie and Freddie are no strangers to Ackman, whose Pershing Square Capital filed 13-D activist reports with the SEC in the third quarter of 2013 for both companies and is listed as the largest investor of each, with about 2% of the shares outstanding. Ackman's effective holdings in both companies is closer to 10%, when you factor in that the U.S. government still controls 79.9% of both firms stemming from the 2008 bailout.

We appreciate a good potential value play in the Stocks Under $10 portfolio and, in fact, have several potential inflection-point names that we believe have potential catalysts a few months out. But the problem we have with investing in Fannie and Freddie is that the companies have limited control over the catalysts that Ackman's Pershing and others see as ultimately rewarding investors.

Now that Fannie and Freddie are back on their feet and profitable again, they essentially pay 100% of their profits to the government, to cover the cost of the $187 billion bailout. The main argument by Ackman and others is that Fannie and Freddie have already repaid the original sum and more through dividends. The answer to that question, which has already been debated for at least two years, will likely have to be settled in court.

In the meantime, it's worth noting that on the totem pole of shareholders between the government and common shareholder, there are tens of billions of dollars owned by preferred shareholders, who'd stand to benefit first from any changes in the government's control of the two companies.

Fannie Mae and Freddie Mac will likely continue to be some of the most volatile and actively-traded low-dollar stocks in the U.S. market. But this is volatility that we will choose to watch from the sidelines, as we do not believe there is a discernible investment edge or transparent timeline for the changes that Ackman and other investors are pushing for.

Columnist Conversations

View Chart »  View in New Window »
this chart is showing great bullish signs here, we like this to take out the old high shortly. ...
Now that AAPL has violated the shorter term support, these are the two areas I have to consider for new buy en...
The symmetry is holding up in MCD.  Target 1 is 163.34 if we continue to hold above here!  ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.