Trump Effect: Fannie Mae, Freddie Mac seen outperforming as election nears

Keefe Bruyette upgraded both Fannie Mae (FNMA) and Freddie Mac (FMCC) to Buy-equivalent ratings as the firm believes the shares are positioned to outperform over the summer given the likelihood of a closely contested presidential election. During the Trump administration, both common and preferred shares of Fannie and Freddie traded as much as three-times higher than they are trading today, the firm noted.

BULLISH AHEAD OF ELECTION: Keefe Bruyette upgraded Fannie Mae and Freddie Mac to Outperform from Market Perform with price targets of $2 and $2.50, both up from $1.25. While the longer-term outlook for government-sponsored enterprise privatization remains uncertain, the shares are positioned to outperform over the summer given the likelihood of a closely contested presidential election, the firm tells investors in a research note. Keefe also notes that during the Trump administration, both common and preferred shares of Fannie and Freddie traded as much as three-times higher than they are trading today.

In the event of a close election, there is material upside from current share levels as the market builds in the possibility of a change at the White House, contends the firm. Keefe further notes that its higher targets are also based on more favorable assumptions, including a higher conversion price for Treasury senior preferred shares.

Back in January, the firm had upgraded both names to Market Perform from Underperform voicing similar arguments at the time, saying that shares could increase meaningfully in the event Donald Trump wins the election. While Keefe noted that it believed the challenging logistics associated with privatizing the government sponsored entities make the likelihood of privatization relatively low, it also said that history suggests the market believes a Trump administration could potentially accomplish privatization. It further pointed out that since Donald Trump’s victory in the Iowa Republican caucus, shares of Fannie Mae and Freddie Mac have outperformed.

PRICE ACTION: In Monday morning trading, shares of Fannie Mae have gained over 2% to $1.28, while Freddie Mac’s stock has advanced more than 3% to $1.10.

“Trump Effect” is The Fly’s recurring series of exclusive stories that highlight stocks that are being impacted, or are predicted to be impacted, by the comments or actions of former President and Republican candidate Donald Trump.