Billionaire Bill Ackman isn’t as much of an activist investor as he used to be. However, he still doesn’t mind trying to influence corporate executives to take steps that would boost their companies’ share prices when it would make money for his hedge fund.
Ackman recently took activist investing to an even higher level. He wants — and expects — President-elect Donald Trump to make two stocks in his Pershing Square Capital Management portfolio big winners. Both stocks have already delivered gains of more than 6x in the last 12 months.
Two powerhouse government-sponsored enterprises (GSEs)
Federal National Mortgage Association (FNMA 27.87%) (commonly known as Fannie Mae) and Federal Home Loan Mortgage Corporation (FMCC 26.29%) (commonly known as Freddie Mac) are government-sponsored enterprises (GSEs). It takes an act of Congress to create a GSE. They’re privately held but provide financial services that benefit the public.
Fannie Mae was given a federal charter in 1938 to provide funds for housing. It doesn’t lend directly to borrowers. Instead, the GSE guarantees residential mortgage securities made by other lenders and then issues and guarantees mortgage-backed securities for investors to buy.
Freddie Mac is a much younger sibling to Fannie Mae. It was created in 1970 as part of the Emergency Home Finance Act passed by Congress and signed into law by then-President Richard Nixon. Like Fannie Mae, Freddie Mac doesn’t lend directly to borrowers. However, it buys loans from approved lenders to enable them to provide more loans. The GSE then packages the mortgages into securities that it sells to investors.
Fannie Mae listed its shares on the New York Stock Exchange in 1968, with Freddie Mac following suit in 1989. However, both were ultimately delisted from the NYSE and shifted to trading over the counter. The two GSEs came under federal conservatorship in 2008.
Why Ackman thinks Trump could cause these stocks to soar more
Between the beginning of 2020 and the end of 2023, Fannie Mae and Freddie Mac’s stocks performed dismally, with both plunging more than 65%. However, it’s a much different story now. Over the last 12 months, Fannie Mae’s shares have jumped more than 540%. Freddie Mac stock is up even more, skyrocketing nearly 600%. Much of those gains came after the presidential election on Nov. 6, 2024.
What was the big catalyst? Many investors think that the federal conservatorship of these two GSEs will end during a second Trump administration. Ackman is one of them.
On Dec. 30, 2024, the billionaire hedge fund manager posted on X (formerly known as Twitter) that “there is a credible path” for the federal conservatorship for both Fannie Mae and Freddie Mac to end within the next two years. Ackman noted, “During Trump’s first term, Secretary Mnuchin [the former Treasury secretary] took steps toward this outcome, but he ran out of time.” He expects that “Trump and his team will get the job done” in a second administration.
Ackman laid out a scenario in his post on how Fannie Mae and Freddie Mae could come out from under federal conservatorship. He envisioned an IPO for both GSEs in 2026 at around $34 per share. That would reflect a nearly 5.5x gain for Fannie Mae and a 6x gain for Freddie Mac.
Big deals but with a big catch
During his real estate career, Trump was known for enjoying making major transactions. Ackman knows this, posting, “Trump likes big deals and this would be the biggest deal in history. I am confident he will get it done.”
However, any big deals to end the federal conservatorships of Fannie Mae and Freddie Mac would arguably come with a big catch. The two GSEs owed $190 billion to the U.S. government at the end of 2024, according to the Congressional Budget Office.
Ackman argued in his social media post that Fannie Mae and Freddie Mac coming out from under federal conservatorship “should generate more than $300 billion of additional profits to the Federal government” in addition to removing around $8 trillion of liabilities from the U.S. government’s balance sheet.
Quite a few details would need to be worked out for Ackman’s scenario to happen. If it does, though, these two high-flying stocks could soar much higher.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
