$Freddie Mac(FMCC)$ $Fannie Mae(FNMA)$
Early Jan, billionaire investor Bill Ackman shared insights on two companies in his portfolio that he believes are near his cost basis but have the potential to see significant growth—up to 10 times his investment—within the next one or two years. He considers these investments to be among his best bets for 2025.
If you are also looking for compelling investment ideas in the new year, let’s dive into what Bill Ackman is focusing on. Bill Ackman manages Pershing Square, a fund with over $12 billion in assets. His portfolio includes well-known companies like Chipotle, Hilton, Nike, and Alphabet. However, today, he discussed two lesser-known investments: Freddie Mac (FMCC) and Fannie Mae (FNMA). These government-sponsored enterprises (GSEs) play a critical role in the U.S. mortgage market.
In a tweet earlier today, Ackman highlighted Freddie and Fannie as standout investments in his portfolio, citing a large asymmetric upside relative to downside risk. Although these stocks have underperformed for years and currently trade near their cost basis, Ackman believes that under a second Trump administration, significant changes could lead to major value creation. He specifically pointed to the potential for these companies to be removed from conservator-ship and to issue new stock, which could drive their share prices to around $34.
Currently, Freddie Mac trades around $3 per share, while Fannie Mae has hovered between $1 and $2 per share for most of the past year. Both stocks saw recent jumps following President Trump’s re-election, which raised expectations that these changes could be forthcoming. Ackman has held these positions for over a decade and sees the possibility of a huge return if they emerge from conservatorship.
Fannie Mae and Freddie Mac were at the heart of the 2008 financial crisis, but they remain essential players in the U.S. mortgage market. They buy mortgages from lenders, package them, and guarantee them as mortgage-backed securities. These GSEs currently back one in four single-family home mortgages and about 20% of multifamily mortgage debt. Despite challenges, they are profitable, generating billions in revenue.
After the 2008 crisis, the U.S. Treasury took control of these companies, owning about 80% of each. The Treasury has since received over $120 billion in profits through a sweeping agreement, which Ackman believes could change under Trump’s second term. If these companies were to be fully privatized and return to the public market, the Treasury could unlock additional value through stock issuances, which Ackman estimates could add up to $600 billion in value (combining the current $300 billion in profits already received).
Freddie and Fannie also hold sizable liabilities, around $8 trillion, which could help reduce the U.S. deficit and provide an additional political win for Trump. However, Ackman’s idea is not without risk. The situation is highly complex, and while the potential for significant upside exists, it will require regulatory changes, stock issuance, and congressional approval—factors that add considerable uncertainty.
Bill Ackman is a highly shrewd investor who previously profited significantly from shorting Fannie Mae and Freddie Mac before the 2008 financial crisis. However, in recent years, he’s held onto these positions as the stocks have remained flat. While he has a history of identifying opportunities, especially at the end of the year when market activity slows, I approach his latest move with some caution. This situation is incredibly complex, probably ranking at a 12 out of 10 in terms of complexity. I’m only scratching the surface with this analysis.
Ackman has a history of calling out ideas during periods of low trading volume, such as with Herbalife years ago, which caused its stock to drop by 40%. While he was proven right in the long run, at the time, it appeared as though he was positioning himself to profit from the market’s reactions. Given that this announcement comes just before the New Year, I can’t help but question the timing, as it could lead to a significant short-term boost, possibly of 30% or more.
That said, I do believe that Ackman may profit from this bet in the long run. The idea behind investing in Fannie Mae and Freddie Mac is sound—they play a key role in supporting U.S. homeowners, first-time buyers, and renters by guaranteeing mortgages that are sold to global investors. This makes it easier and cheaper for people to secure home loans. However, the situation is highly uncertain and will likely take years to play out. If Ackman’s prediction is correct, the 10x potential is understandable.
Uncertainty Around Government Approval Both Fannie Mae and Freddie Mac have been under government control since the 2008 financial crisis, when they were placed into conservatorship to prevent their collapse. The government holds an 80% stake in each, and any move to release them from conservatorship would need approval from the U.S. Treasury, Congress, and regulators. The process would involve complex negotiations and could be delayed or blocked by political factors. There's no certainty about how these entities will be restructured or whether the government will allow them to stand on their own.
Regulatory Complexity Fannie Mae and Freddie Mac have played a central role in the housing market for decades, and their operations are tightly regulated by the government. A shift away from this oversight would introduce significant regulatory risks, as new rules and regulations would need to be established to ensure their stability and prevent another taxpayer bailout. The companies' financial structures would need to be reworked to comply with new regulations, and any missteps could lead to volatility in the housing market.
Financial Health and Capitalization While Fannie Mae and Freddie Mac are profitable today, their financial health is still precarious. Since the government took control, profits generated by both companies have been swept to the U.S. Treasury, which has raised concerns about their ability to build sufficient capital reserves. If they are released from conservatorship, they may need to raise additional capital, possibly through stock issuance. This could lead to dilution of existing shares, impacting their value and future profitability.
Market and Political Timing The timing of such a move is crucial. If the market is not prepared for the release of Fannie Mae and Freddie Mac, or if there is political resistance, their stocks could experience volatility. Additionally, the market’s reaction could be unpredictable—investors may be cautious about the uncertainty surrounding the companies’ future, and the housing market could face turbulence as the companies transition out of government control.
Economic and Housing Market Impact Fannie Mae and Freddie Mac play a vital role in stabilizing the U.S. housing market by purchasing mortgages from lenders and guaranteeing them. If they are set free and undergo significant restructuring, there’s a risk that the companies’ policies and practices could change in ways that negatively affect the housing market. This could lead to higher mortgage rates or reduced access to loans, particularly for first-time homebuyers and lower-income families, which could destabilize the housing market.
Potential for Future Crises If Fannie Mae and Freddie Mac are released from conservatorship without sufficient safeguards in place, they could be at risk of another financial crisis if the housing market turns sour. Without the government's backstop, the companies may struggle to navigate future market downturns, and the taxpayers could end up footing the bill again if a bailout is required.
For me, though, I lean toward simpler investment opportunities. I’m not dismissing Ackman’s idea entirely, I don’t think I’ll be adding Freddie and Fannie to my portfolio at this stage. It's just too complex, and with the uncertainty around Congress and the Treasury, it’s hard to predict if the plan will get approval.
Would you consider adding such a high-risk, high-reward investment to your portfolio?
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