ZS was the winner of our 2013 Season 1 Kairos Research Challenge, which took place end last year where he recommended an event-driven buy on Fannie Mae. 3 months after the presentation, the value has risen an astonishing 88%. Impressive….
Below is an extract from his very recent email to us to update on Fannie Mae.
Kairos Research Challenge is an in-house stock pitch competition where SpringBoard interns research on promising stocks, write an investment summary and give a good presentation on why we should buy the stock they recommend. They showcase their talents to judges and guests, who are analysts and hiring managers from the finance industry front office.
ZS did a good job for our inaugural Challenge and won. In addition, it is great that the stock he recommended boomed. Good work, ZS!
Since Fannie Mae is surging like crazy, I thought I would give a quick update on what I think is going on.
Essentially, what happened is:
FNMA posted record profits for 2013 on 21 Feb
The Dividends that FNMA has repaid the US govt now exceeds the amount injected,
This is coupled with some favourable murmurs on the lawsuit against the US govt for withholding profits (http://www.valuewalk.com/2014/02/fannie-mae-freddie-mac-fairholme/). Hedge funds involved are making more and more noise.
Finally, US congress is still muddling along trying to figure out what to do with Fannie and Freddie with no clear outcome (this was expected – don’t count on congress to agree on anything soon)
In all, this is putting a lot of pressure on the US govt to return the profits to the shareholders.
Despite the enormous run up, this seems to have some legs. FNMA’s preferred shares are still running at 50% of its par value (if everything was operating as normal, the preferred shares would be back at 100% of par). This means that the market is still pricing in some downside risks (i.e. that Fannie Mae would still be nationalised, which means the shares would be worthless). Some people are estimating that the shares could be worth $18 (though a lot of things have to happen first – the govt has to return FNMA to the market. See http://www.valuewalk.com/2014/02/dick-bove-thinks-fannie-mae-worth-18-per-share/)
So for those who are itching to get in, I would say that you are not too late. HOWEVER, given the huge run up in price, the downside risk is much higher now. Previously I said that you shouldn’t put in too much money into this investment, and the same holds true now. This is a bet that pays off if it succeeds, but if it doesn’t, you would lose your entire investment. So only put in money that you are willing to lose.