The part of investing that gets routinely overlooked here is that risk profiles are not identical for all Fannie Mae shareholders. What is appropriate for some is not correct for everyone. The upside for commons is significantly higher, under the right set of circumstances, than for preferred shares. But the risk equation for common stock could drive a worthless valuation or cancellation in receivership, where the liquidation preference of preferred stock likely finishes largely or totally in the money vs. par value which varies by series.
Most of the major investors active in expensive plaintiff litigation own only or largely a portfolio of preferred FnF stock. Pershing Square is the one holder of commons. In Fannie Mae, where he is reported to own around 10% of the O/S total, that would be 100 M shares. He predicts a $20 S/P with success in the courtroom.
Here's the inside deal. If you buy FnF commons in the $1-2 range and they go to $20, you make $18-19. If they go bust, you get $0... If you buy a FnF preferred like FNMAS at $4, it will go to $25 when the commons go to $20 and you make $21 and an 8.25% div. payable at some point + $2.06 per share. If FnF go bust, you get liquidation preference share in proceeds likely to total at least $16 per share and carry very little risk profile.
Common shares bought for a $20 S/P expectation are a good buy for those that can afford the worst outcome. Common shares bought against some $179 to $379 expectation are more like buying a lottery ticket than investing in a rational thesis. The $179 S/P uses a 17X multiple; AAPL trades at a 10.5X multiple. The $379 S/P assumes treble damages which by law cannot be assessed a U.S. Government entity. That is deranged thinking!
I have about 6% of my stock portfolio invested in FNMAS shares. I am actually thinking about doubling that stake. For a retiree whose income is derived from dividends and share price growth, that is the risk tolerance that I am comfortable with. My other holdings are largely in large caps spread across multiple sectors... Apple, Cheniere, Morgan Stanley, Continental Phillips, Norfolk Southern, Barclays, reits like Annaly and Armour, plus some pin money invested in a few "special cases" like Chesapeake, Twitter, Square and FNMAS. My dividend return is around 8% and is sufficient to pay taxes on gains and mandatory withdrawals from my IRA account. To me, that is where the "fit" with FNMAS suits my needs. The best case is for Fannie to refinance, release and resume paying divvies on its approx. $60 B in outstanding junior preferred shares. I do not see redemption as any near term possibility since The GSE Act requires an offsetting new preferred issue for any old ones retired. So the JPD is the art of the deal for me, not just the liquidation preference value.
Said differently, I am relentlessly persecuted on this board for being John Carney or some hater of Fannie because I discount the dreams of beau coups zeros behind the FNMA share price of today and have a less grandiose expectation of more modest gains and risks which meet my personal objectives in the Fannie Mae of tomorrow. Good luck in finding a strategy that works for you.
JMHO.
