Value Microcaps Zip Code Changers

[littlefish]

FNMA (Federal National Mortgage Assoc) potential zip code changer along with Freddie Mac.

Reported over $5 billion income for Q2 and over $7.5 billion thru 6 months before dividends. After dividends they still pulled in over $2 billion thru 6 months.

Total market cap is less than the 6 months earnings (i.e. PE less than .5 based on 6 months #s annualized and less than .25 PE based on Q2 #s annualized).

Company is highly leveraged so going to have wild swings based on overall housing market IMO. BUT their loan portfolio is looking much better now.

Serious delinquent loans down to almost 3.5% of port with nine straight quarters of sequential declines.


Here's a little blurb explaining how strong the earnings were:

http://live.wsj.com/video/do-fannie-and-freddie-profits/1938764D-0E20-4E76-BC99-814AD8742513.html?mod=wsj_blog_tboleft

Oh ya and tangible book value I have at around 47 cents per share.

Remember they just reported a 37 cents EPS quarter and that was after paying back the dividend payment and with a $2.4 billion loss on derivatives (mostly tied to protection from higher interest rates so as rates rise I would think the derivatives could register gains).

Granted there's the $117 billion in preferred share debt to ge tout from under but they have $80 billion in cash/restricted cash and loss reserves over $60 billion. The loss reserves will stay elevated obviously but there's a fair amount of room for it to come down more if the housing recovery continues.

The FNMA preferred series S shares took off on today's earnings but the stock has not (yet).

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fnmas&insttype=&freq=1&show=&time=7

Certainly a complicated company on top of the conservatorship but I can't ignore the earnings power here when you consider the very obvious positive trends they've had in their loan protfolio going back several quarters.

Off Q2 37 cents EPS annualized you have $1.48 in EPS so a PE under .25 currently, almost .2 actually (so a quadruple in share price would still have it a PE below 1 and a quintuple with a fwd PE a bit over 1 based on just Q2 #s annualized).

If you annualize the first 6 months 2012 of $0.35 EPS per share, the PE is still under .5 so a double in stock price would put the company trading at a PE under 1.

Not a great idea to annualize the first 6 months given the CEO commentary back half may not be as strong, but they are starting to build a bit of cushion for longer term IMO with the improved loans on the books (LTV was something like almost 70% for Q2! That's a big downside safety net IMO).
Nobody on Value Motherboard talking about it. Obviously warts with the massive $2.9 billion per Q payments due on the preferreds but look at the potential earnings power given a continued housing recovery and much b etter loan quality lately! This could be the beginning of stabilization for FNMA and FMCC.

The preferred holders seem to be grasping this.

There's a fair amount of shorted shares as well (FMCC has larger portion relative to days to cover but both have fairly large short positions to get squeezed if they pop).

I'm not risking a bunch of money on them but seems like they may be in for a prolonged sweetspot place if housing continues to recover.

All IMO.