Fannie and Freddie upgrade based on possible Trump win, KBW says

Citing an increased likelihood that a potential Trump presidency could end the conservatorships, Keefe, Bruyette & Woods has upgraded its stock ratings on Fannie Mae and Freddie Mac.

The change to market perform from underperform is based on the opinion the government-sponsored enterprises could actually outperform the market this year, especially in a close presidential election.

“Shares could increase meaningfully in the event Donald Trump wins the election,” a report from Bose George, Alexander Bond and Thomas McJoynt-Griffith declared. 

“While we believe the challenging logistics associated with privatizing the GSEs make the likelihood of privatization relatively low, history suggests that the market believes a Trump administration could potentially accomplish GSE privatization.”

And the report notes that the current call from Stifel Financial (KBW’s parent) chief policy strategist Brian Gardiner puts Trump as a slight favorite to win and Republicans to control both houses of Congress following the election.

The report also noted that both companies’ stock price meaningfully increased following Trump’s victory in the Iowa caucuses.

On Jan. 12, Fannie Mae closed at 96 cents a share. By Jan. 17, it was up to $1.08 per share before closing the next day at $1.10. Freddie Mac went from 80 cents a share on Jan. 12 to 88 cents on Jan. 17, and 90 cents one day later.

KBW boosted its price target for both to $1.25 per share, up from $1 per share.

But it also gave a word of caution, namely that KBW still sees little long-term value in either company. That is because of the U.S. Treasury’s senior preferred stock holdings.

Ending the net worth sweep and amending the preferred stock purchase agreements has only increased the liquidation preference of those shares. And that increases every quarter because of the government-sponsored enterprises’ retained earnings.

“Without the Treasury making a concession (either a write-down or a conversion to common) of its senior preferred position, the current shareholders will have no value,” KBW said. “And even with a conversion to common, which we think is the most likely scenario, the common shares are likely to be diluted down to close to zero.”

The preferred shares might have some value, but that is dependent on how the government restructures Fannie and Freddie, the report continued.