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.