There’s a lot of great news for investors in Federal National Mortgage Association (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corp (OTCMKTS:FMCC), or more commonly known as Fannie Mae and Freddie Mac.
FNMA and FMCC stock have been two of the best performing since Donald Trump won the general election for President of the United States. Then on Wednesday Fannie Mae and Freddie Mac jumped a whopping 45%! Why?
Trump’s pick to be Treasury Secretary, Steven Mnuchin, told CNBC a number of initiatives that he feels are most important. One of which is his belief that GSEs can not be government owned.
This is a topic that BNL Finance and analysts from all over have touched on. With Fannie Mae and Freddie Mac being government owned, neither FMCC stock or FNMA stock will ever reflect the true size and strength of their underlying business. That’s because all the profits are being drained by the government, unjustly so.
Keep in mind, these are massive companies, and if not government owned, the stock upside would be unprecedented. As previously explained to BNL Members, FNMA stock and FMCC stock could instantly be $20/share. Over the course of two or three years, if the economy continues to grow, Fannie and Freddie stock could very well be $35/share or more.
That represents massive upside from $4.50, but as it has been the last five years, the big question is whether it will happen. We believe that GSEs separation from the government is more likely under Mnuchin than it has been post-2008. However, despite the gains, the market is still skeptical.
How to play FNMA stock & FMCC stock
If the market thought it was very likely, FNMA and FMCC stock would be far higher. There is still a lot of skepticism. Although, FMCC and FNMA stock have rose nearly 200% in November, which I believe is the market’s way of being cautiously optimistic.
Fact is Trump picked Mnuchin, and Mnuchin does not want the government to own GSEs. As a result, the chances of a rapid fallout in sentiment is unlikely.
Given the upside for FNMA and FMCC stock if Mnuchin separates government from GSEs, I would not be shocked to see Fannie and Freddie go significantly higher in the coming months, in anticipation.
The real risk comes at that point. We all know that politicians are known for broken promises, and Donald Trump has a lot to change. Who knows whether this will be a priority, or how long it will take.
If FMCC and FNMA stock were to soar another 75%, it might be wise to take profits. There is no reason to get greedy, and if six months pass with few reasons to believe a split is coming, both stocks could quickly fall back.
Furthermore, if Mnuchin does not get his wish, and FNMA and FMCC stock rise another 100%, the losses would take both stocks right back down to $2/share. In other words, I prefer to stay on this ride a little longer — we added FNMA to the BNL Portfolio under $2/share — then take profits and buyback at $20 if GSEs split from the government.
After all, even at $20/share, there would still be significant upside for FNMA stock and FMCC stock if they split from the government and the economy grows. However, I don’t want to be greedy and risk 300% gains, or more.