I am not talking about 50% or 100% potential returns. Believe it or not, after living through multiple market cycles, returns like those are almost expected. It takes upside potential of 300%, 500%, 1,000% or more to get me excited.
Today's pick, Federal National Mortgage Association (OTC: FNMA), commonly known as Fannie Mae, soared from around $0.25 in early 2013 to a high of $6.35 on March 11 -- a more than 2,000% gain. A week later, it dipped briefly below $3, where it began an uptrend that carried it back into the $4.50 area.
I first recommended FNMA in June 2013, around $2. Shares have more than doubled since then, and I am convinced they could easily double again in the next few months and soar to over $20 within the next year.
My target is actually on the conservative side compared with hedge fund king Bill Ackman. He owns more than 115 million shares and expects they could climb as high as $47, which would make FNMA a 10-bagger.
Although it is publically traded, Fannie Mae is a government-sponsored enterprise (GSE), meaning it is backed by the U.S. government. It purchases and guarantees residential mortgages for low- and moderate-income homeowners.
Shares plummeted from above $65 in the summer of 2007 to below $1 in the fall of 2008 as the subprime mortgage crisis rocked the industry. The federal government seized control of Fannie Mae and Freddie Mac in September 2008 in an attempt to shore up the nation's housing market.
Today, some politicians are pushing for their dismantlement. The Senate Banking Committee recently passed a bill aimed at winding down Fannie and Freddie. Should this occur, shareholders will be wiped out, which is the major risk factor associated with owning this stock.
However, the bill did not garner enough votes to make it to the full chamber in 2014. Analysts don't expect any legislative action until 2017.
The economy is steadily improving. This lowers the risk associated with mortgages, making Fannie Mae something the government should want to hold on to. It just reported its largest profit in its 80-year history of $84 billion in 2013.
Not to mention the government owns warrants to purchase 79.9% of the equity in Fannie Mae and Freddie Mac, which don't expire until 2028.
There is simply no private system that could absorb the risk of the 60% of U.S. mortgages backed by these GSEs. Melvin Watt, the new head of the Federal Housing Finance Agency, which oversees Fannie and Freddie, stated he does not plan to reduce their role in the housing market until Congress can agree on an alternative plan.
Despite the risk of dismantlement, the upside potential in this low-priced stock is huge. Taking a look at the technical picture, FNMA is in a steady uptrend.
There is clear support at the $3 level. Wait for a breakout above $4.75 resistance to enter long positions.
Recommended Trade Setup:
-- Buy FNMA on a break above $4.75
-- Set stop-loss at $3
-- Set initial price target at $9 for a potential 89% gain in three months
-- Set secondary price target at $20 for a potential 321% gain in 12 months
-- Set stop-loss at $3
-- Set initial price target at $9 for a potential 89% gain in three months
-- Set secondary price target at $20 for a potential 321% gain in 12 months
Disclosure: Dave Goodboy owns shares of FNMA.
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