FNMA Stock Price Down 62% This Week – Time to Buy FNMA stock?
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The stock of FNMA, also known among investors as Fannie Mae, has collapsed this week amid a ruling from the United States Supreme Court that allows President Joe Biden to remove the head of the Federal Housing Finance Agency (FHFA), Mark Calabria, from his post.
Wednesday’s ruling from the country’s top court resulted in a 32% single-day downtick for Fannie Mae stock, while shares are down nearly 7% so far this morning as various investment funds were betting that the court would deny President Biden the chance of ousting the Trump-appointed official.
For Fannie Mae, a private entity partially owned by the US government after being placed under conservatorship during the 2007-2008 financial crisis, the ruling results in the potential continuation of the arrangement made with the US Treasury Department of handing over all of its profits to pay back the $187 billion it draw from the federal government to survive the crisis.
The now-deposed head of the FHFA backed Fannie’s shareholders claim regarding the removal of the company from conservatorship status, which means that his removal from office results in a setback as it remains to be seen if the newly appointed chief of the FHFA will share Calabria’s views on the matter.
Is this recent legal setback providing an opportunity for those seeking to invest in Fannie Mae based on the prospect of the firm possibly being placed out of conservatorship in the future?
The following article takes a closer look at the company’s fundamentals to possibly respond to that and other questions investors might be having about this government-sponsored company.
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Fannie Mae Stock – Fundamental analysis
Fannie Mae facilitates mortgage borrowing by repackaging loans made by financial institutions into mortgaged-backed securities backed by FNMA while earning a fee for doing so.
Even though the company’s revenues have been going up and down in the past few years, the company’s profitability has head down in the past three years, moving from $16 billion back in 2018 to $11.8 last year. Most of the decline in net income last year can be attributed to increased provisions from loan losses amid the uncertainty resulting from the COVID-19 crisis.
Meanwhile, the Federal Reserve’s decision to lower its benchmark interest rate has resulted in lower fees for the institution as refinancing applications have surged due to consumers taking advantage of this positive environment to reduce their mortgage payments.
As of last year, the firm had a shareholder’s equity of $25.26 billion, which is almost two times FNMA’s current market capitalization. This low price-to-book ratio can be attributed to the firm’s inability to pass on its profits to shareholders amid Fannie Mae’s arrangement with the US Treasury Department.
Moreover, at its current market capitalization of $13 billion, Fannie Mae is being valued at only 1.1 times its 2020 net income.
Based on this week’s ruling, that arrangement will remain as is unless President Biden’s newly-appointed FHFA chief shares Calabria’s view about relieving the firm from its conservatorship status – something the market doesn’t seem to believe at the moment as reflected by the sharp downturn in Fannie Mae’s stock price.
The Fannie Mae we see now is an entirely different animal compared to what the company was back in 2007-2008, which means that once and if the government does decide to remove its conservatorship status the upside potential for investors will probably be sizable based on the stock’s fairly depressed P/B and P/E ratios. However, it could be years until that happens.
Fannie Mae Stock – Technical analysis
From a technical perspective, this week’s meltdown has pushed the price of FNMA stock near a long-dated weekly support area at $1 per share. Interestingly, the stock has bounced off this support level three times already in the past, which reinforces the view that such a level might present a buying opportunity for short-term traders.
However, with the price currently sitting at $1.43 per share, there is still a significant downside risk of around 30% before the stock gets there.
For now, the outlook for the stock remains bearish amid the negative momentum prompted by this Supreme Court ruling. Moreover, announcements from President Biden about the appointment of a new FHFA chief along with his comments about the company’s future could lead to either a more pronounced downturn or a trend reversal if he does support exiting the firm at some point during his tenure.
Meanwhile, if the price does reach $1, it would be interesting to keep an eye on the price action to see if that support level holds – which could open up an opportunity for a rebound.