Fannie Mae (FNMA) stock plunged almost 10 percent on Jun. 24, and is now trading near its 52-week low The stock has been in a free fall this week after an unfavorable Supreme Court ruling. Should you buy the dip in FNMA stock?
Fannie Mae is in the business of buying mortgages from large U.S. banks. It then sells these as MBS (mortgage-backed securities) to investors. The deal is win-win, as banks can free up their capital for further lending while FNMA can sell securities to yield-hungry investors.
Fannie Mae was under conservatorship
The 2008 financial crisis was triggered by a crash in the subprime mortgage market. While some, such as Michael Burry, capitalized on the crash, it marred several iconic financial institutions' balance sheets.
Then began the great clean-up. While some companies died out, billionaire investors stepped in to save some they found attractive. Warren Buffett, for instance, bailed out Goldman Sachs.
The U.S. government also stepped in to save some companies, and committed billions in taxpayer money to Fannie Mae and Freddie Mae. The companies issued preferred stocks and were placed under the Federal Housing Finance Agency's (FHFA) conservatorship.
Why is Fannie Mae stock plunging?
Even as Fannie Mae’s finances improved, it continued to transfer its excess profits to the U.S. government. Irate Fannie Mae stockholders filed a suit, arguing that the company had paid much more than it had borrowed. Investors were hoping that the company would exit federal control, which would have meant its profits being redistributed to stockholders. The Supreme Court quashed these hopes but sent the case to the lower court to enable investors to claim damages.
Along with Bill Ackman's Pershing Square, Fannie Mae’s institutional investors include Fairholme Capital Management, Blackstone Group credit unit Paulson & Co., and Discovery Capital Management.
Bloomberg Intelligence analyst Elliott Stein isn't optimistic about the ruling, saying investors “can’t recover the bulk of the overpayments they sought.” Since the ruling means that Fannie Mae will remain under federal control and stockholders still won’t have a right to the profits, FNMA stock plunged.
FNMA stock's forecast
According to MarketBeat, analysts' average target price for FNMA is $1.67, which implies a 21.6 percent upside from its current price. One analyst recommends “buy,” one recommends “hold,” and one recommends “sell.”
Wall Street has also taken note of the decision, and Odeon Capital, which upgraded the stock to a “hold” with a target price of $2 earlier this year, has suspended its coverage of the stock. The Supreme Court ruling is a major setback for Fannie Mae investors, as FNMA's rally was built on the premise that the company will emerge from federal control. The stock's sell-off might continue, with major selling from some big shareholders.