Wall Street's Top Investors, Like Bill Ackman and Michael Burry, Are Betting on 2 Stocks That President Donald Trump Could Help Turn Into Multibaggers

Core Viewpoint - Bill Ackman and Michael Burry have expressed strong conviction in the potential of Fannie Mae and Freddie Mac, with implications tied to the Trump administration's decisions that could significantly impact these stocks [2][14]. Company Overview - Fannie Mae and Freddie Mac are government-sponsored entities (GSEs) that play a crucial role in the mortgage market by providing liquidity and serving as a secondary market for mortgages [4][5]. - Both entities have a monopoly in their business due to their implied government backing, which allows them to purchase mortgages from banks and package them into mortgage-backed securities [5]. Historical Context - The U.S. government intervened during the Great Recession, injecting over $187 billion into Fannie and Freddie, which resulted in the government acquiring senior preferred stock and warrants for nearly 80% of each company's common shares [6]. - A controversial "net worth sweep" agreement was established, allowing the government to collect over $300 billion from the GSEs' profits [7]. Current Financial Status - Fannie Mae generated at least $17 billion in profits in both 2023 and 2024, with over $105 billion in shareholder equity by the end of Q3 2023, although it is approximately $44 billion short of meeting regulatory capital requirements [8]. - The Trump administration is considering an initial public offering (IPO) for Fannie and Freddie, potentially valued at around $30 billion, which would be the largest IPO ever [9]. Challenges to IPO - Significant dilution is a concern due to the government's existing preferred stock and warrants, which could affect new investors [9]. - The potential increase in mortgage rates by 0.5% to 1% post-IPO is another challenge, as the GSEs would lose their implied government backing, making them riskier [12][13]. Valuation Perspectives - Current market caps are approximately $13 billion for Fannie Mae and $7 billion for Freddie Mac, but estimates suggest they could be worth multiples of their current trading values if the IPO is successful [15]. - Ackman estimates that Fannie and Freddie could collectively be worth $400 billion if their stocks transition to the New York Stock Exchange, while Burry anticipates they could trade at 1.5 to 2 times their book value post-IPO [16]. Investment Considerations - Junior preferred shares are considered a safer investment with less risk, while common shares present a higher risk-reward scenario [18].