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  1. Home
  2. / Investing
  3. / Real Estate

What the Pros Are Buying, Part 3

Bruce Berkowitz and Bill Ackman have moved into Fannie and Freddie.
By SHAM GAD Nov 20, 2013 | 03:00 PM EST
Stocks quotes in this article: FMCC, FNMA, GGP

Who would have thought that after nearly five years, that now may be an excellent time to take a closer look at the common shares of Freddie Mac (FMCC) and Fannie Mae (FNMA)? Lately both of these companies have been in the headlines thanks to two very prominent investors. First in line is Bruce Berkowitz of Fairholme Capital. Berkowitz holds over $3 billion in the preferred stock of both of these companies, so he's not yet ready to bet on the equity, at least not until recently. Earlier this month Berkowitz announced a bold attempt to buy both Fannie and Freddie from the government for approximately $52 billion. To be specific, Berkowitz wants to only buy the insurance operations of both entities.

Recently, however, activist investor Bill Ackman has jumped on board and announced that his firm Pershing Square owns just under 10% of the common stock of both Fannie and Freddie. If you haven't noticed, Fannie and Freddie are gushing in profits. So much so, that the U.S. government's $187 billion capital infusion has almost been nearly repaid in the form of dividends from Fannie and Freddie. On top of that, Uncle Sam still holds equity in both firms making it highly likely that when the U.S. exits the positions, the taxpayer will have reaped a very attractive return on investment.

Fannie Mae shares currently trade for about $2.65. Freddie shares are around $2.70. Both are up nearly 1,000% this year. But clearly Berkowitz, and especially Ackman, see immense opportunity in both of these entities on a going forward basis. Investors should note that Ackman and Berkowitz have recently worked together in the past in the restructuring of General Growth Properties (GGP) and the outcome for equity investors was not short of astonishing.

The opportunity in Fannie and Freddie is incredibly intriguing: two top rate investors are very bullish on them and it's likely other will follow suit. That being said, Berkowitz and Ackman are not going up against corporate owners but, instead, the federal government. And I think it's safe to say that no elected official will do anything that could be perceived as enriching money managers at the expense of taxpayers -- no matter how smart the deal looks.

So, this could be a lengthy process. Also, Ackman clearly can't use his typical playbook -- issuing a long publicized slide presentation, being critical of owners (in this case, the federal government) and so forth. But these are very sophisticated investors who are clearly respected in their fields. And to be sure, I think many of us will agree that businesses such Fannie and Freddie are better run in private hands as opposed to the public.

So far, Senator Bob Corker has best described the tone about this situation in Washington: "An offer of this nature would not be in the public interest. Without meaningful legislative reform we would still have dominant entities owned by the private sector but operating with an implied government guarantee, leaving taxpayers at great risk."

However, Corker is suggesting that a deal could be made if the taxpayer risk were eliminated. Berkowitz seems confident that this would be the case in this situation. And Ackman clearly sees great value in the common shares of both of these firms.

Look at like this: The level of profitability that these firms are now generating and will generate in the coming years makes them incredibly undervalued businesses -- save for their particular current connection to the U.S. government. Pay close special attention to these shares in the days ahead -- a deal could be made that would benefit both Uncle Sam and investors. After all, if the federal government can transfer Fannie and Freddie risk over to the private sector, that is clearly good for the U.S.

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At the time of publication, Gad had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Real Estate

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