Investors are looking at Federal National Mortgage Association (Fannie Mae) (OTCMKTS:FNMA) and Federal Home Loan Mortgage Corporation (Freddie Mac) (OTCMKTS:FMCC) all wrong. FNMA stock and FMCC stock owners view them as financial institutions, mortgage giants. They should look at Fannie Mae and Freddie Mac like biotech stocks, nothing more. Here’s why.
A clinical stage biotech company’s valuation is figured by A) its likelihood of having a candidate gain FDA approval and B) the drug’s commercial outlook. In retrospect, clinical stage biotech stocks are speculative bets on the future.
If a late stage biotech stock has a $300 million market capitalization, the market is telling you that A) its chances of clinical success are low or B) its chance of commercial success is equally dismal. A company like Kite Pharma Inc (NASDAQ:KITE) with a market capitalization near $5 billion — with no drugs yet on the market — tells investors that it has a great pipeline with a high likelihood of clinical and commercial success.
Once more, biotech stocks are speculative bets on the future. Ironically, that’s exactly how investors should view FNMA stock and FMCC stock.
Why FNMA stock & FMCC stock are like biotech stocks
Fannie Mae and Freddie Mac are known as GSEs. They are essentially owned by the government, and because of a bad deal during the financial crisis, the Treasury is allowed to “sweep” all of their profits each quarter and use them however it sees fit. As a result, Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) stay under-capitalized.
FNMA stock and FMCC stock are nothing more than speculative bets that Fannie Mae and Freddie Mac will one day be freed from government conservatorship and operate as the mortgage giants they are. In other words, they are biotech stocks in late stage development, with investors awaiting data to unlock value.
Problem is the courts won’t free Fannie and Freddie, despite returning more than $255 billion to the Treasury since they were placed in government conservatorship. Fortunately, we now have a Treasury Secretary in Steven Mnuchin who co-owned the former IndyMac; tried to navigate difficult mortgages during a post financial crisis regulatory environment at Goldman; and understands why it is important for entities that control about all of the owned or guaranteed mortgages in the $14 trillion housing market to be independent of the government.
Mnuchin has said on many occasions that he wants to separate the government from the housing market, and that it is a top priority.
With that said, FNMA stock soared from under $2/share to $5/share late last year when Donald Trump won the election and nominated Mnuchin for his Treasury Secretary. Then most recently FNMA stock fell to $3/share after losing a court hearing. As previously explained, neither FNMA stock nor FMCC stock owners should have expected anything substantial from the courts. After all, FNMA stock hovered around $1.75/share for most of 2016 until it became clear that Trump and Mnuchin would have control.
Much like a clinical stage biotech, FNMA and FMCC stock react to every headline that affects its chances or extends the timeline to separate themselves from the government. Ultimately, GSE reform is the only way it happens. A private market solution for capital will also be a big part of the solution.
Why Fannie Mae & Freddie Mac are the best biotech stocks
With Kite Pharma (NASDAQ:KITE), biotech investors are happy to support a $5 billion market capitalization because they believe its lead candidate Axicabtagene ciloleucel will have an accelerated path to commercialization. As the first CAR T therapy, many believe Axicabtagene ciloleucel could create several billions in peak revenue if approved to treat multiple blood cancers.
While Kite Pharma (NASDAQ:KITE) has positive Phase 3 data, the company must still see what safety restrictions the FDA may require. There is also unknowns anytime a clinical stage biotech takes its first product to the commercial stage.
Meanwhile, we already know that Mnuchin wants to free the housing giants via GSE reform. We also know that Donald Trump’s economic strategy involves fewer regulations. Collectively, these things would be equivalent to strong Phase 3 data. Much like Kite Pharma (NASDAQ:KITE), the one thing we don’t know when it comes to Fannie Mae and Freddie Mac is a timeline.
Still, the market is willing to support a $5 billion market capitalization for a company that may create $2 billion in worldwide sales by 2020. Yet, the prospects are extremely bullish that Fannie Mae (OTCMKTS:FNMA) and Freddie Mac (OTCMKTS:FMCC) will eventually be freed from government conservatorship, and when that happens, there is far less unknowns surrounding how the companies will perform.
For example, had the Treasury not swept Fannie Mae’s fourth quarter profits, the company would have produced net income of more than $5 billion! And that’s just one quarter!
Therein lies the reason that FNMA stock or FMCC stock is so attractive for long-term investors. FNMA stock supports a $3.5 billion valuation, less than Kite Pharma, with a very high likelihood of eventual GSE reform that will yield a company with $5 billion in fourth quarter net income. That’s more profit than a company like Kite Pharma could hope for in revenue.
Hence, to say that Fannie Mae stock would support $30/share with GSE reform is conservative. And to say that both FNMA and FMCC stock will trend towards $10/share as Steve Mnuchin gets comfortable in his new role and starts actively pursuing a solution is more than fair. Regardless, a very, very strong argument can be made that FNMA stock and FMCC stock are not only like biotech stocks, but collectively, they are the best biotech stocks in the entire market right now; even a small position equals a huge payoff if the dominos fall in place.