Readers who like spicier ideas by now might have heard about ongoing discussions of a potential release of two (in)famous US mortgage companies from conservatorship, i.e. a possible privatization. Yes indeed, state-owned (or partly-owned) enterprises aren’t just a thing of perceived socialist or communist countries. At the latest after none other than hedge fund billionaire Bill Ackman pitched his investment case aggressively on Twitter, stocks of Fannie Mae and Freddie Mac have made big waves. According to Ackman, there’s still a substantial upside of 5x left (after already being up by 5x since November). Is this THE no-brainer opportunity for 2025?

Summary and key takeaways from today’s Weekly
– The cases of Fannie Mae and Freddie Mac have made big waves with a privatization of the mortgage giants being discussed.
– Famous hedge fund manager Bill Ackman entered the discussion by aggressively promoting the cases on Twitter and pitching an upside of still roughly 5x (after the stocks already went up significantly).
– I am not so optimistic, as many things aren’t clear. My Premium PLUS members already had their fun in this regard.

Still barely discussed or even known in Germany (not even on Twitter), the cases of Fannie Mae (ISIN: US3135861090, Ticker: FNMA) and Freddie Mac (ISIN: US3134003017, Ticker. FMCC) have made big waves over the last months.

If you’ve been following Bill Ackman on Twitter (or if you have looked into my research report, see here), you will likely have heard about the ongoing privatization discussions which by the way are not entirely new. But this time’s different.

At least that’s the expectation after a failed attempt during Trump’s first term.

Both, Fannie and Freddie as they’re called in short, have become infamous during the financal collapse of 2008 when the housing bubble popped, making both practically insolvent. With the government stepping in to the rescue, the giants despite still remaining listed, became government-controlled.

In his pitch on these two mortgage giants, Ackman in late-December made the case for both being released from their conservatorship. He sees substantial upside that would result in multi-baggers, if the privatization were to happen as he presented it.

Is this a free lunch?

With my risks-first approach (paired with high upside), I am able to find stocks with great returns.

Case in point, the preferred stock Series S of Fannie Mae was my idea I sent to my Premium PLUS members in early October 2024. In late-December 2024, I closed the case after +178.5%.

Some ideas take more time for the thesis or catalyst to play out. Others like this one shot up almost instantly.

Join me and my members on our journey to beat the markets!

^{both as per 12 February 2025 market close – since August 2022}

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Multi-bagger or bag holder?

Note: I am making purposefully several simplifications in this Weekly, as I want to communicate only the core message. The cases are much more complex and sophisticated. There are many details to be considered and certain aspects are completely unclear, where only time will tell how the government will decide.

Make no mistake, despite for some time even having been penny stocks and until today still trading 80–90% below their all-time highs (though being up 5x over the last months), we are talking about mission-critical companies in the properties sector with a combined market share of about 50%.

That’s why in the past even the slightest speculation about a release from their conservatorship has caused massive spikes in these stocks. Every time investors saw their chances waining, shares of both have collapsed again rather quickly.

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Fannie Mae and Freddie Mac are so called government sponsored entities or GSEs. They operate in a quasi half-private, half-public way with the official mission to make housing, i.e. mortgages, more affordable in the name of the government.

However, they are publicly traded and they are for-profit companies.

Their task was and is to buy, securitize (guarantee), bundle and resell home mortgages from the primary mortgage banks, i.e. those who lend out the money directly to the home buyer. With this, they are taking tied up capital (receivables) from the balance sheets of the banks to enable them to lend more money. They don’t hold these mortgages themselves either, but resell them to external investors.

The truth likely will be somewhere in between. But they are not caritative entities.

Important to understand, they are not lending any money themselves.

A mix of fees and also interest income is what they are living off. A booming housing market and ideally high interest rates make these companies thrive.

On the other hand, low interest rates and a lame housing market hold them back.

That’s why Fannie and Freddie have boomed before the financial crisis of 2008–2009, only to fall apart in the midst of it when it turned out that many mortgages were of low quality and home buyers unable to service their debt (see the stock charts further below).

The US government had to bail them out, because both have a combined market share of around 50% which makes them mission critical. With the real estate sector being mission critical itself, not rescuing them would likely have caused a massive depression.

Since 2008, both are under so called government conservatorship.

Although stocks of both have remained listed on the stock market until today without interruption, first the losses and later all the profits were taken care of by the government. In 2008, a special senior preferred share class each was issued to recapitalize the companies which only the government owns (until today).

It is not tradable and it was the only class that received massive dividends as soon as the companies became profitable again.

Common and also junior preferred shareholders saw nothing – until today.

Note: There are court rumblings whether these dividends were against the constitution and if common and junior preferred shareholders should receive a compensation – that is not the topic of today. As said, simplified.

Below, we have the max and ten-year charts of both, Fannie and Freddie.

They are both down massively from their former glory days. Maybe that’s too much of an understatement. The charts to the left both look like of bankrupt, clinically dead patients that never came back up on their legs.

But over the last months, both stocks have multiplied, with the expectation that there is still more to come.

Those who caught the exact bottom, may even celebrate a tenbagger.

^{source: both Seeking Alpha, see here}

^{source: both Seeking Alpha, see here}

We are talking about extremely profitable businesses. Thus, it is understandable shareholders are frustrated for not having received anything.

At the same time, the government exclusively pocketed big dividends – 300 bn. USD since it took the companies under its umbrella – which by the way have practically more than paid back the bailout efforts, despite not being called this way. Dividends technically are not paybacks of state aid, but voluntary distributions of profits.

In total numbers and in the case of Fannie Mae, the bailout cost was 116 bn. USD (see here), while the cumulated dividends paid to the government until today are more than 300 bn. USD for both and about 200 bn. USD for Fannie Mae alone.

With the rules and laws as is, despite money having been transferred to the government, the bailout is technically NOT repaid. This is important to understand.

With both Fannie and Freddie being highly profitable after a few tough years post-crisis, voices to finally release them from their conservatorship have only become louder. The ownership, respectively the control by the government isn’t necessary anymore. And by generating high profits, these companies have become big cash cows as well as pretty valuable if measured by common standards.

Just to give you a feeling – and from here on I am mainly discussing Fannie Mae further (Freddie is more or less the same from the core idea, though with slightly different numbers) – here are the last ten year’s net profit figures of Fannie Mae:

Over the last twelve months, the net profit figure is 16.8 bn. USD.

Is this much or little?

Well, until the massive spike as of lately, respectively as of the date of my research report for my Premium PLUS members in early October 2024, Fannie Mae was trading at a PE ratio of 0.4x.

This is no typo.

Until the presidential elections, Fannie Mae had a market cap of well below 10 bn. USD, swinging around 7 bn. USD – while the net profit was around 17 bn. USD.

Speak of bargains.

With Donald Trump having secured a landslide win (this was the core requirement for my thesis to play out), stocks of Fannie and Freddie jumped instantly by 60% in just one day. At least this was the number for the preferred stock I discussed in my report. But the common shares also massively jumped and until today are up five-fold.

The reason is straightforward.

Under the democrats, being it Obama or Biden, chances for a privatization were nil, hence the stocks frequently were hammered and never really came back.

Now a new hope has arisen.

What you should also know before we come the Ackman’s pitch and my personal view, Trump already during his first presidential term wanted to make the privatization.

However, time ran out and the initially high hopes turned into dust.

To stress how perverse the development of the stock price was, net profits were the highest at the time under Biden when the stock was exactly going through its trough.

At the low, the stock traded at a PE ratio of even below 0.1x.

For a reason, though, as the future was uncertain for shareholders, respectively it was certain that under the Democrats a privatization would not take place.

With this, now to the Ackman-pitch.

Bill Ackman in late-December 2024 came out on Twitter with his idea to promote the stocks of Fannie and Freddie. It is well known that he has been a shareholder of both for more than a decade now. And he is also the single biggest shareholder of both.

One should be fully aware of that.

Below is just a small screenshot showing only a part of his first tweet. The original post is much longer and with more detail.

There and in a subsequent extensive presentation a few weeks later, also on Twitter (see here the slide deck), he said that under a long-overdue privatization of the mortgage giants, the government could make a 300 bn. USD win from releasing both – on top of the already pocketed ~300 bn. USD in enforced dividends as the common stock according to Ackman has substantial upside.

Shareholders of both, common and junior preferred stock, would also be winners according to Ackman, but the former less so as the upside is capped at par value.

But is it really that easy?

According to Ackman, the expected IPO could be in late-2026 – at the earliest. Much can happen in two years, but it could even turn out that two years are not enough.

Trump’s second term runs until early 2029. US presidents aren’t allowed to run for a third time. What looks like enough buffer could indeed be a bit tight.

I am going to explain why.

Both companies need to raise capital to shore up their balance sheets. The question is in which way? Will they earn enough (and have enough time to accumulate and retain their earnings with the risk of a delay of the privatization, thus stress-testing investors) or will they need to issue common stock to raise capital (thus diluting common shareholders)?

This is very important.

The reason is that like other financial institutions, primarily banks, also Fannie and Freddie need to have a certain capital or equity ratio in relation to their balance sheet to level out potential losses, should they occur.

This is the issue, as technically both still have negative equity (capital shortfall) after subtracting the treasury’s definitely to-be paid back senior preferred stock of 120 bn. USD (which needs to be paid back for the liquidation preference of currently 208 bn. USD).

If we also factor in the junior preferred shares, another 20 bn. USD comes on top. The juniors, or JPS, could face a special deal like a conversion into common stock, be repaid, too, or just at least for the time being left as is. We don’t know at the moment.

In this case and at current numbers, Fannie would have a financial hole of give or take 50 bn. USD (90 bn. USD minus senior and junior preferred shares).

At the current pace, they’d need three full financial years (and the completed but not yet reported Q4 of FY 2024) only to break even and achieve not-negative anymore equity, assuming a repayment of the preferreds.

But they need positive equity.

In this very interesting letter from the Congressional Budget Office I urge you to read completely if you’re interesting in this case (see here), in over 250 simulations of potential scenarios and outcomes, the authors play around with different figures. There are guesses at the lower end of 3% in equity to total assets, but also 6%.

What doesn’t sound like much is a very substantial make-or-break question.

Ackman mentioned the possibility that Fannie Mae potentially might not need to raise any additional capital as it could earn and retain enough through its business until the IPO. However, he assumes the treasury’s senior preferred stock will be forgiven on the basis of having been paid back through the exclusive dividends.

But this is far from a certain thing. Any potential and definitely any official delay of the privatization will stress-test shareholders, fearing the IPO could fail again. You can be sure the stocks will go into a bear market quickly.

Ackman made a calculation that the fair value for Fannie Mae shares is 34 USD apiece. This includes two more highly profitable years, but also some growth assumptions and as said a cancellation without a repayment of the seniors (assuming the dividends did that).

All in all, a complex calculation.

I am going to do a more back-the-envelope approach further below as I believe stock ideas and valuations need to be easy to understand and grasp.

What one should also know is that the government not only owns the aforementioned senior preferred stock (again, the assumption is that it will be seen as paid back by the dividends), but also warrants to own in total 79.9% of common stock.

In other words, this would massively dilute current common shareholders, while holders of preferred stock wouldn’t be hurt. That was the reason for why I featured a junior preferred stock in my report. To take the risk down.

Regarding the senior preferred stock, this class has a so called liquidation preference (I briefly mentioned it above) or in other words a buyback price. Too not make it too complicated, since 2019 no dividends were paid and the retained earnings increased the liquidity preference due to a change in rules by the then-treasury (btw. under Trump 1.0) which has risen to 208 bn. USD per 30 September 2024.

The company does not have that money, not even close.

The basic assumption and pretty much even the requirement is that the senior preferred stock would need to be canceled or forgiven with the argument that the distributed dividends have more than paid back the bailout means which Ackman argues with.

If this were the case – a very big if – the warrants are the remaining and likely deciding piece in this complex puzzle.

It is highly unlikely that the government would forgive both, the seniors and also the warrants. They need the money and they will be happy to raise it to sell the common stock to other external investors. So in essence, we need to consider the potentially dilutive effect of the warrants on the common stock. Ackman said he has factored that into this calculation.

However, I have some issues with that.

I do not arrive at Ackman’s 34 USD in fair value per share.

The following is just my calculation, based on my assumptions. I am not saying that I am smarter than Ackman or the likes.

But assuming Fannie Mae will IPO at the current net income of 16–17 bn. USD and a PE ratio of 10x (no further capital raised to achieve target capital ratios, seniors canceled – two big ifs), the market cap would be 160–170 bn. USD. Ackman assumed a PE ratio of 15 on potential 2035 results and discounted them back at 8% (and a few things more, I shortened it for simplicity).

I must say, a 15 PE ratio sounds a bit high and the discount factor of 8% a bit low.

Above, you can see that the (junior) preferred stock has a value of 19 bn. USD on the balance sheet. Assuming they won’t get converted to common stock (also uncertain), the targeted equity market cap for the common stock in my scenario would be 140–150 bn. USD as we need to subtract the higher-ranked JPS value from the total equity market cap.

With today’s current fully diluted share count (i.e. already assuming full dilution from the warrants, but no dilution from a potential capital raise) of ~6 bn., this would be 23–25 USD apiece.

This is under very optimistic assumptions, I guess. Maybe I am too pessimistic.

But there’s another negative alternative. The treasury could convert the senior preferreds into common stock as compensation for a cash repayment.

You can be sure that the current commons would be toast then.

The seniors have several times the value of the entire company’s current market cap. Depending on whether we’re talking about the 120 bn. USD on the balance sheet or the 208 bn. USD of the last liquidation preference, we’re talking about factors of 3x–5x.

Taking everything together, that’s far from the no-brainer I am looking for.

At the time of my research report for my Premium PLUS members, the junior preferred Series S stock (FNMAS) traded a bit above 4 USD. This was in early-October, a month before the presidential election. In response to the election, FNMAS instantly jumped by 60% and over the next weeks climbed above 10 USD.

Then with Ackman pounding the table, I decided to close my case at slightly below 12 USD for a total return of +178.5% for my members in less than three months.

I didn’t feel convinced anymore with the case having become a no brainer for everybody. I have read through many posts on twitter and comments on Seeking Alpha where an estimated 95% are bullish, seeing this as a safe thing.

Herein lies the danger.

Was this a right decision? So far yes, as FNMAS has only swung back and forth and not advanced meaningfully further anymore over the last five to six weeks.

The common stock has jumped (+180% since Ackman’s first twitter post after a double post-election) and in this regard I left some performance on the table. But as I explained, there are many uncertainties and clear risks.

Adding a bit more fuel to the fire, this entire case also clearly depends on the wellbeing of the economy, on interest rates as well as the housing market.

Seeing the following is not motivating or confirming.

While in absence of another major housing crisis – not my base case scenario – profits shouldn’t come down substantially, it is possible that even the 16–17 bn. USD in yearly profits are a bit too high. With lower profits, and more important negative momentum, the valuation multiple will be negatively affected.

Of course, I might be wrong and this becomes indeed a multi-bagger, even from the current level.

However, I am more convinced that the easy money has clearly been made already.

Now, the case (speaking of both, Fannie and Freddie) has become absolutely mainstream with only one possible direction in the public perception. This is not for me. When everyone sits on the same side of the boat, the likelihood to capsize rises.

If you like much less known, not-in-the-spotlight ideas with the potential to become multi-baggers, consider to become a Premium PLUS member. My two latest ideas clearly have the potential to multiply. One even already by year end. The other is already up by roughly 30%.

Conclusion

The cases of Fannie Mae and Freddie Mac have made big waves with a privatization of the mortgage giants being discussed.

Famous hedge fund manager Bill Ackman entered the discussion by aggressively promoting the cases on Twitter and pitching an upside of still roughly 5x (after the stocks already went up significantly).

I am not so optimistic, as many things aren’t clear. My Premium PLUS members already had their fun in this regard.

By becoming a Premium or Premium PLUS Member, you get instant access to all my already published research reports as well as several updates.

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