Author Topic: FNMA and FMCC preferreds. In search of the elusive 10 bagger.  (Read 3551776 times)

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13970 on: October 07, 2019, 09:20:13 AM »
@cherzeca

1. 30% appreciation in next 12 months is reasonable speculation, but still speculation.
2. at 10% par gse prefs were enticing enough to me to speculate; at 50% par, much less so.
3. far majority of my gains have come from long-term holdings in wonderful businesses, not special situations nor speculations. it's been way more enjoyable and instructive, as well.
4. speculating, even if the projected return in the near term is higher, just doesn't seem worth the opportunity cost of finding other wonderful businesses (even if they aren't cheap enough to buy now, there is value in identifying them now).

@hardincap

1.  agreed.  this is in my risk portfolio, not in my safety portfolio.

2.  enticing to me is a combination of pricing and expectation.  while pricing has gotten more expensive, my probabilistic expectation has gone up even more so.  at lower % of par, events were mostly nonexistent and so I relied on TINA.  now, events have occurred (collins and I expect another legal shoe to drop, POTUS plan, fhfa/treasury letter agt, fhfa rfp) that substantially increases my expectation probability.

3. yes and no.  I love great businesses that can be owned forever. you may have to buy "expensive" but if you must sell, likely sell higher. but to find "mispricing" you have to find a situation where you can reasonably expect the market will agree with me...later.  this involves higher risk, which is why we need to limit the size of our speculation bucket.

4. this is where I mostly disagree with you. I dont see any opportunity cost in holding GSEs, since I cant find a speculation that I think is better risk/reward (my 30% target).  and here is my point on that:  GSEs are a great business when viewed apart from the political risk and recap risk (which I will get to).  GSEs are cash flow machines par excellence.  they could go into runoff and be huge winners, but they are churning out huge amounts (last Q was highest securitization activity) of high quality mbs (extremely low delinquency rate).  yes if there is a recession, delinquency rates will increase and securitization will decrease at the margin, but the core business (existing guaranteed mbs) is hugely profitable.  so I see most of the risk as i) political (and here I think the political risk went way down when Crapo exhorted FHFA/treasury to proceed with administrative reform; I dont see trump not being potus until 1/21 at the earliest, and frankly I think he will be reelected only because of what is on offer as an alternative), and ii) recap execution (and here is the biggest risk, though again I think this risk will become reduced over the next 6 months as retained earnings are built and financial advisors are retained and get to do their work).

put another way, as I see things, I see no other 30% annual target opportunity that is a better speculation, and I say this admitting that I have thought this for the last 5 years (and have for certain years been right and other years wrong). now, if one is tired of this speculation, I get that.  but looking forward and assuming one wants to be exposed to a small measure of speculation, I think GSEs fit the bill, arguably more so now than ever.
« Last Edit: October 07, 2019, 10:27:03 AM by cherzeca »


hardincap

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13971 on: October 07, 2019, 08:06:24 PM »
@cherzeca your points are valid. i agree the dynamics have shifted powerfully, and sudden shifts like this tend to be under appreciated. 

maybe im suffering from gse fatigue, but i think at 50% par, I get better "return on time invested" elsewhere, esp given that the gses were always far outside my CoC. that time invested doesnt have to turn into a buy decision in a month or a year, but i know it will eventually pay off. opportunity cost of owning the prefs to me is time i could otherwise use to find the next 10-100 bagger. id be fooling myself if i said i can keep the gses and forget about them for the next year, given how quickly things can change.

Quote
but to find "mispricing" you have to find a situation where you can reasonably expect the market will agree with me...later.  this involves higher risk

not necessarily risk: the correct way to invest is to put in the work and earn "secrets" that can translate into an edge in the markets

investorG

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13972 on: October 08, 2019, 09:01:16 AM »
45pct of par after the good recent news -- wow, I guess rather than feel frustrated I should feel grateful about where the security prices would be otherwise.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13973 on: October 08, 2019, 09:43:10 AM »
45pct of par after the good recent news -- wow, I guess rather than feel frustrated I should feel grateful about where the security prices would be otherwise.

I think this gets to the notion of "speculation" that @hardincap and I were discussing just above.  for many institutional investors speculation is a dirty word.  of course many HFs are willing to seek these out, but for the vast majority of potential investors the GSEs will only become investable when much of the speculation has been wrung out, assuming as I do that it will be wrung out.  I think the movement of the GSEs from speculation to investment has been taking far longer than I expected, which again is nothing other than a warning sign for most investors, but it seems to be gaining pace lately.  but here is my point: I expect the actual transition to investment will be a tipping point-like event, a phase change rather than a straight line progression from where we still are (speculation) to investment.  no-one can predict what (and more importantly when) would precipitate that phase change (though I have my thoughts), which again is why a lot of investors are still staying away...leading imo to excessively discounted % of par

emily

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13974 on: October 09, 2019, 07:30:42 AM »
ď These analysts are pests in the society who upgrade after the fact to save their face
https://www.streetinsider.com/Analyst+Comments/UPDATE%3A+Keefe%2C+Bruyette+%26+Woods+Upgrades+Fannie+Mae+%28FNMA%29+to+Market+Perform/15993937.html
There is another one who who boveís to wall street and manipulatesĒ

Spekulatius

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13975 on: October 09, 2019, 06:01:13 PM »
These two companies already have publicly available and audited financial statements. The timing to raise capital is excellent and these are large, public for decades, proven and profitable enterprises unlike momo garbage such as WeWork.

Once a large and reputable investment banker is selected, it won't take very long to get pieces into place as they are incentivized to get it done so they get paid.

Think about the Saudi Aramco IPO. It was first thought about around 4 years ago. They had no public financial statements, never been audited, never had an outside engineering firm to audit their reserves or a requirement to be public, didn't know on which exchange to list, IPO delayed due to a large petrochemical acquisition, IPO likely delayed due to poor market conditions for oil and corresponding valuation, government interference as this is their bread and butter, and on and on. Yet, they should be public in their own market by the end of this year.

Plus for preferred holders, you won't have to wait 4 years (which I see as excessive anyway based on above) to know your fate as a resolution should be a pre-condition to start the IPO process.

Cardboard

FWIW, there is still a GSE trading in the public markets, which may serve as a reference - Farmers Mac:
https://finance.yahoo.com/quote/AGM?p=AGM

The valuation is pretty undemanding.
To be a realist, one has to believe in miracles.

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13976 on: October 10, 2019, 08:38:53 AM »
@spek

farmer's Mac shows a current pe of about 8.5x. moelis used a range based upon other financial institutions:  https://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf. p.27
« Last Edit: October 10, 2019, 09:32:22 AM by cherzeca »

Luke 5:32

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13977 on: October 10, 2019, 02:36:31 PM »
Live event going on now at GMU (Fairfax, VA... about an hour outside of Washington, DC).

https://twitter.com/ACGAnalytics/status/1182408443967221760
In discussion at @MasonLEC, @FHFA Director @MarkCalabria publicly indicated #GSEs could leave conservatorship before hitting top capital threshold and operate under consent decree.
Take 4 minutes and listen to it. "Stars" by Skillet: https://www.youtube.com/watch?v=TbLJyjfyACM

cherzeca

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13978 on: October 10, 2019, 03:17:58 PM »
Live event going on now at GMU (Fairfax, VA... about an hour outside of Washington, DC).

https://twitter.com/ACGAnalytics/status/1182408443967221760
In discussion at @MasonLEC, @FHFA Director @MarkCalabria publicly indicated #GSEs could leave conservatorship before hitting top capital threshold and operate under consent decree.

this is smart and reassuring. 

Spekulatius

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Re: FNMA and FMCC preferreds. In search of the elusive 10 bagger.
« Reply #13979 on: October 10, 2019, 03:36:43 PM »
@spek

farmer's Mac shows a current pe of about 8.5x. moelis used a range based upon other financial institutions:  https://gsesafetyandsoundness.com/wp-content/uploads/2018/11/Blueprint-for-Restoring-Safety-and-Soundness-to-the-GSEs-Final.pdf. p.27

Farmers Mac isnít really the same business model, itís income mostly comes from the net interest margin, while the GSE would be 2/3 fees and 1/3 interest income (roughly)

The GSE would have a more stable income stream, specially in a low interest rate environment. AGM stock only took off after interest rates came off from zero.
To be a realist, one has to believe in miracles.