FMCC have been faced with a tough decision over whether to invest in the common stock or the preferred stock. While the common stock has the greater potential upside, the preferred stock has a fixed liquidation value making it slightly less risky.
FNMFO is an unusual series of preferred stock. FNMFO is also convertible into Although the GSEs are highly profitable, the issue preventing preferred dividends from being paid remains the net worth sweep rather than a lack of available funds. But there is the possibility that this conversion option could prove valuable. However, Ackman still assumes the Treasury is able to exercise its warrants for While there are plaintiffs challenging the legality of the warrant exercise, the issuance of these warrants was part of the capital injection and not connected to the net worth sweep.
Since the case against the net worth sweep is the easier one to make and the main point being pressed by Fairholme and Pershing Square, voiding the warrants, will be more difficult than just ending the net worth sweep.
However, FNMFO trades at a similar valuation of about 15 cents on the dollar as the other Fannie and Freddie preferreds so the market is assigning negligible value to the conversion option despite the outside possibility for it to provide enormous upside.
Shares can go weeks without trading so investors may have to wait for an extended period of time to get an order filled at a reasonable price. This would also limit the ability of FNMFO investors to quickly sell the securities in the event of a fundamental change or a need to raise cash. FNMFO also faces all the risks associated with investing in Fannie Mae including the possibility that the net worth sweep will not be struck down by a court and a political solution will leave nothing for private investors.
This risk alone makes Fannie Mae investments speculative and only for highly risk tolerant investors. FNMFO offers Fannie Mae investors the ability to buy a preferred stock with a fixed liquidation value while having access to common stock upside if the Treasury warrants are voided.
The lack of liquidity is a negative but a combination of a long-term holding period and using limit orders can partially make up for the low volume. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it other than from Seeking Alpha. I have no business relationship with any company whose stock is mentioned in this article.
The author does not guarantee the performance of any investments and potential investors should always do their own due diligence before making any investment decisions. Although the author believes that the information presented here is correct to the best of his knowledge, no warranties are made and potential investors should always conduct their own independent research before making any investment decisions. Investing carries risk of loss and is not suitable for all individuals.
This article discusses one or more securities that do not trade on a major U. Please be aware of the risks associated with these stocks. Lack of liquidity is an issue but long-term investors could get common stock upside for free. Want to share your opinion on this article? Disagree with this article? To report a factual error in this article, click here.
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