Fannie MAE and Freddie MAC the Best Ever Penny Stock

Santos Manuel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The market is replenished of penny stocks, stocks under 1 dollar value but with a lot of uncertainties. Stocks being bought by a lot people with the faith to discover the next Wal-Mart. Consequently, they discover the stock failed to be the next Wal-Mart and now is time to dig for another faithfully stock. Right now we have the uncommon penny stock Fannie Mae (NASDAQOTCBB: FNMA) and Freddie Mac (NASDAQOTCBB: FMCC)NASDAQOTCBB:FMCC(NASDAQOTCBB: FMCC). Stocks with a value less than 1 dollar but backed by the federal government to avoid bankruptcy. These new penny stocks are the best ever penny stock to be owned. Because we know these stocks are very real, are backed by the federal government and are necessary for keeping up the housing market. Its true right now they owe the government close to 180 billion but both have revenue close to 100 billion, therefore they need only 20 percent of profit to pay out the bailout debt in about five years. After that we will see again two profitable companies and no longer a penny stock company.

The next question is; what are these companies doing to be profitable again? Simply they are refinancing their debts for lower debt interest rates. We can see it during the past two years how they sell bonds at lower interest rates and buying back their higher interest rates bonds. Eventually they will have all their debt refinance to a lower rates translating this into an interest expense reduction. Refinancing their debt to lower interest rates would help them to make a profit when the interest rates rises, by lending the money taken with a lower interest rate at a higher interest rate and then taking a profit from the interest spread.

Also, recently Fannie Mae and Freddie Mac reached an agreement with Bank Of America (NYSE: BAC) in order for them to repurchase the mortgage loans sold to FNMA & FMCC during January 1, 2000 through December 31, 2008 helping the Fannie Mae and Freddie Mac to decrease the number of bad loans mortgage. Other banks such as Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) are also working with similar agreements.

Fannie Mae and Freddie Mac are under conservatorship by the government and the new rule is swept off all the profit as dividend, keeping both companies with only the necessary to survive. This new rule will keep both companies declaring no profits, even if they make a profit. This will cause the price of stocks to keep down until the speculative start to questioning what will happen as soon the government stop sweeping off the dividend, and this will cause the stock price to go up, but slowly. Maybe reaching 5 dollars, but not the 70 dollars as like five years ago, avoiding Wall Street would benefit by the bailout and keeping the tax payers happy. When Fannie Mae and Freddie Mac became a stable profitable companies and the government recovers the bailout money they would decide to convert the bailout preferred shares to common stocks, keeping the control and then eliminating the bailout dividend. Due to a lot of new common stocks the value of the stocks would be diluted but the government would keep the control of both companies and we will see it again with a market capital of 50 or 60 billion but with a stock price between 5 or 10 dollars.

In conclusion, the housing market and the economy are improving slowly but are improving; also, the government is offering incentives to refinance the mortgages and Fannie Mae and Freddie Mac are refinancing their debts too. Therefore, owning their stocks as long term investments at a penny stock price is worth the risk. The penny stocks are the riskier stocks due to the uncertainties which they carry. Fannie Mae and Freddie Mac are not free of uncertainties. At least we know they are real companies with the blessing of the US government and are key players for sustaining the housing market. Looking into the long term the only uncertainties are when the government will stop to charge the dividend and how will they proceed with the bailout preferred shares? That’s why I think FNMA and FMCC are the best ever penny stock to own.


Santos Manuel Mercado is long FNMA and FMCC. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Bank of America, Citigroup Inc , and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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