Paul: WEB bailed on FRE because he thought they had uncompensated exposure to a catastrophic disaster like Ca. earthquake, as I recall. I suspected at the time that the departure might be a ploy to get them to reinsure, but since WEB has mostly leveled, I'll take him at his word. The potential for Congressional disenfranchisement, WEB discounted, but I find concerning. I'm never on real firm ground with finance type companies due to high leverage. FRE looks like 36/1 debt equity but I suspect that's not comparable because there are mortgage assets on the onther side - unless the earthquake hits, in which case there's rubble on the other side...lots of it.
I have mortgage market exposure thru CD and WM and am not looking to increase it at this point in the cycle.
Here are some comments on FRE & FNM from a 12/7 Merrill report [The codes mean they're 'strong buys' short & long term:
• Fannie Mae (FNM, B-1-1-7, $76.50) and Freddie Mac (FRE, B-1-1-7, $63.31) have both been weak over the last month as the stock market has been increasingly favoring an economic recovery.
• It is our view that earnings for 2002 are likely to be achieved by both companies even if an economic recovery pushes interest rates higher. However, multiples could go a bit lower if signs continue to point to an economic recovery.
• Peak multiples for both companies were in the 18x range in 2001, a seemingly ideal environment for both companies. Trough multiples have been in the 12x range for many years. With the stocks now at 12.8x our 2002 EPS estimate for Fannie and 13.1x our 2002 EPS estimate for Freddie, it would seem that downside risk is less than 10%. |
