Fannie Mae and Freddie Mac Have Friends in High Places, But Can They Keep Your Shares Afloat?

The first six months of 2014 haven't been easy to watch for most investors in Fannie Mae and Freddie Mac. But will it continue?

Jun 25, 2014 at 12:47PM

With nearly half of the year already behind us, Fannie Mae (NASDAQOTCBB:FNMA) and Freddie Mac (NASDAQOTCBB:FMCC), shareholders have certainly had their fair share of ups and downs -- what has driven this performance and are shares good enough for your money?

Volatility abound
The chart below depicts the total return for both Fannie Mae and Freddie Mac's common shares, and it looks eerily similar to many roller coasters you'd find in any amusement park: a sharp rise, a precipitous drop, and a series of rises and falls.

FNMA Total Return Price Chart

FNMA Total Return Price data by YCharts

Though every stock will produce a chart like the one above, shareholders of the GSEs know that the ups and downs of early 2014 have told a story of fierce debate and unrelenting confidence.

The crux of the problem
Both Fannie Mae and Freddie Mac have been at the center of a contentious battle over the future of the U.S. government's role in the mortgage market since being bailed out for more than $185 billion. Some see the institutions as key to the still-recovering housing market's finance component, others find them outdated and unnecessary.

Despite consistent growth for both firms' shares early in the year, the March introduction of a bipartisan bill from the Senate Banking Committee that recommended a winding down of the two GSEs caused shares to plummet more than 30% in a single day. For now, both firms have evaded the hangman's noose, though opinions still vary greatly about their future.

Putting your money where your mouth is
If a legislative bulls-eye was the biggest downer for Fannie Mae and Freddie Mac so far in 2014, superinvestor confidence has been the GSEs biggest boon. Some of the most respected and most followed names in investing have thrown their hats in the ring -- putting their money on the survival of the GSEs.

Bruce Berkowitz has been championing the GSEs cause for a while now, suing on behalf of shareholders for the rights to a share of the now flush profits. He's also asserted his belief (which is shared by other notable investors) that Fannie Mae and Freddie Mac should be privatized.

Bill Ackman's reassertion into the fray, with Pershing Square's upping its stake in both firms to 11%, was a huge boost to the stocks' performance prior to the aforementioned wind-down bill's introduction. More recently, adding some fuel to the investor-confidence fire, news that activist-shareholder extraordinaire Carl Icahn invested over $50 million in the two firms boosted shares earlier this month.

Nothing's certain
So far this year, shares may have been bolstered by renewed confidence from these billionaires, but any negative news of the shaky ground on which these GSEs are sitting could easily cause those gains to be reversed.

Though it's telling that some of the most noteworthy investors of this age have backed their confidence in Fannie and Freddie with millions of their funds' dollars, sentiment is an unwise investment thesis. The only thing guaranteed for investors of either GSE is that volatility will reign until their fates are determined.

These stocks offer a smoother ride
One of the biggest battles over Fannie Mae and Freddie Mac is the lack of dividends to shareholders. And it's no surprise why -- the smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Jessica Alling has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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