FNM (NYSE)

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Fannie Mae (FNM, NYSE)

Everything is going right for the financial services industry in Canada, U.S. and the European economies. I isolate these developed nations because there are obvious and much talked about problems in Asia including Japan. Instead of rehashing those issues suffice it to say that if you start lending money to your brother in law, uncle and dubious friends, you will face a delinquency problem, no matter how honorable your intentions may be. We may also have similar or worse such problems but they are but a tiny fraction of the overall funds involved. It appears that our banks and financial services companies have learned a lesson or two over the last decade; a lesson that our Asian and Latin American partners need to learn, perhaps the hard way. Does that mean that things can not go wrong here? No, we may be sowing the seeds of potential disaster in the future. Many have pointed out some of those excesses such as the incredible pace of mergers and acquisitions , which have no better than 60% chance of success. Then there is the approach to buy everything including the kitchen sink at your ATM machine (tellers will be history, soon) which flies right in the face of the nineties' consumer who has shown clearly that he likes to shop around and get the best deal, not necessarily all under one roof. One of these or perhaps something entirely different may come back and bite you, the investor. 

Fannie Mae is a government sponsored corporation providing secondary market facilities for FHA, VA, conventional, and adjustable mortgages. Fannie Mae is the largest investor in home mortgage loans in the United States. It buys mortgages from lenders, such as banks, mortgage banks, and savings and loan associations and funds them by issuing debt in the global capital markets. It earns a spread between the yield on the mortgages and the cost of debt. 

 Fannie Mae has had more than a decade of double-digit growth in operating earnings. It achieved this record despite wide fluctuations in interest rates and changes in economic conditions during the past ten years. Fannie Mae has an important initiative to provide by the end of the decade $1 trillion to finance over 10 million homes for American families. On the Wall Street, number of brokers recommending as: Strong Buy, 10; Moderate Buy 4 and Hold 3. In spite of a fairly strong support of the street and record, the stock has dropped more than 10% over the last two weeks, perhaps many more are directing funds to more exciting M&A plays than to bet on the tried and true. I am taking this as an opportunity to buy. 

Charts:

High return on equity and return on assets have become a hall mark of Fannie Mae and for that reason alone, the P/E ratio should be in the higher than 21. You could see a drop in the P/E if the interest rates were to shoot out of our range of 5% to 6%. 

Based on the same rate related caveats, EPS should come in at what is expected for this year and that means a good 20% move for a stock that has lower risk than some of these high flyers who depend upon the market betting higher and higher.

Beta: 1.20 Earnings Per Share: Low $3.20, High $3.60 Return on Equity : 24.48% Plowback: 67%

Last Updated May 14, 2000