FNMA and FMCC preferreds. In search of the elusive 10 bagger.

[orthopa]

https://www.multihousingnews.com/whats-ahead-for-the-gses-under-the-new-administration/

Edited November 19 by orthopa

[sleepydragon]

https://open.substack.com/pub/ruleoflawguy?r=ag2rx&utm_medium=ios
 

 

[sleepydragon]

On 11/18/2024 at 6:42 AM, DRValue said:

 

Craig Phillips was aware of it and agreed with it under Mnuchin in Treasury.

 

IIRC Ackman's thesis is that the commons increase when conservatorship ending is announced, which means less dilution, which means a higher share price, which means less dilution, which means a higher share price...

 

i have more preferred than commons, and added to the preferred recently. This was a lottery ticket before election but now the preferred is really a 50 cents on a dollar.

 

I find it’s hard to believe that commons will be zero. If the govt want to re-ipos the shares, it will be hard to raise capital if they zeroed the commons? Also, all the common shareholders like Ackman can also buy preferred, thus will be able to vote on restructuring. But on the other hand, i am also not sure that the potential payoffs for commons will be a lot higher than preferred, cuz this is completely decided by the kindness of the secretary at time of restructuring.

 

by the way, Buffett has 300bn cash. Can he buy the whole thing? That will be so cool !

 

 

[TwoCitiesCapital]

21 minutes ago, sleepydragon said:

 

i have more preferred than commons, and added to the preferred recently. This was a lottery ticket before election but now the preferred is really a 50 cents on a dollar.

 

I find it’s hard to believe that commons will be zero. If the govt want to re-ipos the shares, it will be hard to raise capital if they zeroed the commons? Also, all the common shareholders like Ackman can also buy preferred, thus will be able to vote on restructuring. But on the other hand, i am also not sure that the potential payoffs for commons will be a lot higher than preferred, cuz this is completely decided by the kindness of the secretary at time of restructuring.

 

by the way, Buffett has 300bn cash. Can he buy the whole thing? That will be so cool !

 

 

 

If you think they're worth $0.50, I'll sell you some for $0.25? 

Edited Thursday at 12:44 AM by TwoCitiesCapital

[This2ShallPass]

I have the common, bought more as a lottery ticket. Now thinking of converting to preferred. Which preferred is better, I want to buy both Fannie and Freddie..

[sleepydragon]

5 hours ago, This2ShallPass said:

I have the common, bought more as a lottery ticket. Now thinking of converting to preferred. Which preferred is better, I want to buy both Fannie and Freddie..

i think FNMAS has the highest dividend rate, so potentially it could worth more under certain conditions of re-org. 

[This2ShallPass]

7 hours ago, sleepydragon said:

i think FNMAS has the highest dividend rate, so potentially it could worth more under certain conditions of re-org. 

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

[sleepydragon]

38 minutes ago, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

Yeah, i only have fnmas and fmckj.

i think the main difference is liquidity. Some people buy the less liquid ones which can be cheaper sometimes.

[DRValue]

15 hours ago, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

I have a bunch of different prefs but mainly fnmas, fnmaj, fmckj. The less liquid fnmaj always traded at a pretty steep discount to fnmas due to liquidity and offered a big coupon with more upside

[sleepydragon]

 

https://www.ft.com/content/1ef2a6ef-a623-484f-9879-8cb3c26f67fb
 

Accolades rolled in, including from Larry Kudlow, Trump’s former National Economic Council director, who told the FT that Bessent was “absolutely first rate” and an “excellent choice”. 

[sholland]

On 11/21/2024 at 3:54 PM, This2ShallPass said:

Thanks. For Freddie, would that be FMCKJ (8.375% non cum)?

 

Also, do ppl here buy a basket of preferreds or just the highest dividend one? Not sure if the various preferreds have different conditions.

FMNAT dividend = 8.25%, but is less liquid

FMNAS dividend = 7.75%

FMCKJ dividend = 7.875%

 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_T_05152008.pdf
 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_s_12062007.pdf
 

https://www.freddiemac.com/investors/pdf/FtFPrefStock-oc.pdf

 

[DocSnowball]

8 hours ago, sholland said:

FMNAT dividend = 8.25%, but is less liquid

FMNAS dividend = 7.75%

FMCKJ dividend = 7.875%

 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_T_05152008.pdf
 

https://www.fanniemae.com/sites/g/files/koqyhd191/files/migrated-files/resources/file/ir/pdf/stock-info/series_s_12062007.pdf
 

https://www.freddiemac.com/investors/pdf/FtFPrefStock-oc.pdf

 

 

Still waiting for this to play out fully. This story has had so many twists and turns. I'm in the skeptical camp, yet hold 10% of portfolio at this point. Waiting a little more to decide, the tide has definitely turned on expected outcomes, and the market agrees. 

 

A while back, I had calculated the net present value of  FNMAT using the dividend rate promised in the prospectus (8.25% dividends unless called back at par, valuing it as a perpetuity). If dividends are turned on in future it will be a delayed perpetuity and discounted further based on when dividends are turned on.

 

Revisiting this today to compare this option to alternative investment decisions and whether to hold or sell. 

 

NPV = Dividend/(r-g) where r is the discount rate and g is the growth rate (assuming zero growth rate of dividend, and beta =1 for a low risk utility when released)

Discount rate = Risk free rate + Implied Equity risk premium at current level of index*Beta = 4.43%+ (5*1) = 9.43% (approximating 5% as current ERP)

 

NPV whenever dividends turned on (example one year from now)

       = 2.06/0.0943%

       = 21.85 FOR FNMAT

 

NPV if dividends turned on after capital raise completed 12/31/2026 - more realistic

21.85 discounted back another year at 9.43%

      = 19.97 for FNMAT

 

Multiply this by your OWN JUDGMENT of probability of success for various outcomes and you get your expected value

Let’s say:

1) 25% chance of this outcome of dividends turned back on 12/31/26 = 25% of 19.98 = 5

2) 25% chance of getting par value on 12/31/25 = 0.25*25=6.25 current value, discounted back one year at 9.43% = 5.71

3) 25% chance of getting 50% of par on 12/31/25 = 0.25*12.5 = 3.125 current value, discounted back one year at 9.43% = 2.86

4) 25% chance of zero = 0 

 

Net present value (sum of all the possibilities) = 13.57

Current market price = 9.48

 

Please point out the blind spots

Edited Sunday at 10:28 PM by DocSnowball