Fannie Mae & Freddie Mac: A Day-Trader’s Dream Come True

by Dan Burrows | March 20, 2013 11:15 am

Most penny stocks have tiny market caps, deliver a paucity of information to regulators and shareholders, and are so thinly traded they’re not even worth touching with someone else’s money.

Then there’s Fannie Mae (PINK:FNMA[1]) and Freddie Mac (PINK:FMCC[2]). Remember them? The mortgage giants are still in government hands, five years after requiring more than $146 billion in bailout funds. They were delisted from the New York Stock Exchange back in the summer of 2010, but still live on — on the electronic over-the-counter bulletin board.

And, boy, are they lively. Today alone, shares in both companies have each climbed over 20% so far. Heck, they have more than doubled — with gains of 190% and 210% — since Monday.

True, Fannie and Freddie both go for about 85 cents a pop now, so we’re literally talking about nickels and dimes here. However, at the same time, these are not typical over-the-counter or pink-sheet shares.

Fannie Mae has a market cap of more than $1 billion and does more than 6 million shares in average daily volume. Freddie’s market cap is $540 million and has an average daily volume of 2.5 million.

A big problem with penny stocks[3] is that they are illiquid — meaning they’re tough to buy and sell without moving the price. But Fannie and Freddie are as liquid and large as plenty of listed names. Supervalu (NYSE:SVU[4]), Smith & Wesson (NASDAQ:SWHC[5]) and Monster Worldwide (NYSE:MWW[6]) all have similar market caps and volume characteristics.

The difference, of course, is that those listed names presumably have a future, while Fannie and Freddie are in limbo. And the shares don’t trade on anything approaching fundamentals.

How could they? Fundamental analyst seeks to guesstimate the net present value of a company’s long-term stream of future dividends, or at least cash kept on the books as retained earnings.

Fannie and Freddie, meanwhile, exist only because Washington can’t decide what to do with them.

The most recent rally in the stocks was sparked by a report that Fannie Mae is looking into whether an accounting adjustment could free up billions of bucks to partially pay back the government. And anything that sparks a glimmer of hope that either company could one day become a viable, long-term investment re-listed on a major exchange causes the stocks to pop.

And although it is improbable, it is not impossible that Fannie or Freddie could one day come back from the living dead.

Heck, don’t look now, but Fannie Mae has a three-quarter profit streak going. Over the first nine months of 2012, it booked $9.7 billion in net income. It expects to post a “substantial” profit in the final quarter of the year, too. That means it will swing to a fiscal 2012 profit of more than $10 billion from a net loss of $17 billion in the previous year.

This is the sort of thing that gives some speculators hope that Fannie or Freddie could one day be a moon-shot bet.

But it is still only speculative hope, at best, if for no other reason than the total dysfunction in D.C. Fannie and Freddie are still controlled by the Federal Housing Finance Agency (FHFA), and there’s no telling when Washington will figure out what to do with them.

As FHFA Chairman Edward DeMarco told a congressional committee recently:

“Few of us could have imagined in 2008 that we would be approaching the fifth anniversary of placing Fannie Mae and Freddie Mac in conservatorships and have made little meaningful progress to bring these government conservatorships to an end.”

So, yes, most mom-and-pop investors should give Fannie and Freddie a complete and total pass.

But these are indeed large, liquid stocks with plenty of news coverage and regulatory filings to go with them. I don’t believe in speculating or day-trading, but if you do, go for it. You could do a lot worse than playing around with Fannie or Freddie.

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

  1. FNMA:
  2. FMCC:
  3. penny stocks:
  4. SVU:
  5. SWHC:
  6. MWW:

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