Bill Ackman says high-quality stocks are 'extremely cheap' — and highlights 2 that could offer 10x returns

Fannie Mae and Freddie Mac are down roughly 40% YTD and Bill Ackman called them “stupidly cheap,” claiming they could deliver up to 10x returns from current levels. Michael Burry echoed Ackman and disclosed a sizable stake in both in December 2025, citing changed regulatory/policy dynamics and historic unfair treatment after 2008. This is prominent investor-driven bullish sentiment amid a volatile market near correction territory, likely to influence flows and cause idiosyncratic single- to low-double-digit moves in the two stocks rather than broad market impact.

Analysis

The market is pricing these GSE equities like a binary litigation/regulatory lottery rather than a credit/value story; that creates asymmetric payoffs for long-dated, small-sized exposures. If a policy or settlement pathway emerges that preserves equity upside (recapitalization, negotiated buyout, or material rollback of the dividend sweep), equity claims could reprice 3x–6x within 12–36 months as guaranteed cash flows resume and court outcomes clear. Conversely, a decisive legislative clampdown or fresh Treasury cash calls could drive common shares toward worthlessness quickly; that tail is ~30% in our view and should dominate position sizing and hedging.

Second-order winners include MBS investors and any counterparty that holds GSE debt or preferred instruments: resolution that strengthens common equity typically compresses guarantee-fee risk premia, tightening spreads for agency MBS and benefiting mortgage REITs that can lever carry — but only if the reform is orderly. Losers under a negotiated recap could be private mortgage insurers and originators that face higher competition from restructured GSEs, and banks that underwrite the recap if incremental fees or capital calls are imposed.

Timing is event-driven: expect volatility spikes around key legal rulings, Treasury or FHFA announcements, and the next political calendar inflection (months to 2 years). Tactical execution should avoid outright large cash positions; prefer staged buys, asymmetric option structures or pair trades to monetize mispriced convexity while capping cash exposure. Liquidity is thin and counterparty risk matters — use exchange-traded hedges where possible and size to 0.5–1.0% NAV per position unless hedged.

Key Decisions for Investors

• Accumulate FNMA (FNMA) and FMCC (FMCC) common shares in tranches: target combined exposure 0.5–1.0% NAV, stagger buys every 5–10% drawdown, horizon 12–36 months. Risk/reward: base-case 3x–6x upside on constructive reform (25–40% probability) vs binary downside to near-zero (30%); implement 40% stop-loss or hedge with index puts.
• Hedged option play (if liquid): buy 18–30 month call spreads on FMCC/FNMA where available (e.g., buy 2027 $10 call / sell $40 call) sized to 0.25% NAV to capture convex upside while capping premium outlay. Target payoff 4–8x premium in reform scenario; max loss = premium.
• Pair trade: long FNMA/FMCC common (0.5% NAV) funded by short position in an agency mortgage REIT (NLY) equal notional exposure for 6–12 months. Rationale: a policy resolution that revalorizes equity should compress agency spreads and lift GSE equity relative to leveraged REITs; risk is correlated downside in a housing shock.
• Event hedges: buy 6–12 month XLF puts (~0.25% NAV) around anticipated legal/Treasury milestones to protect against a policy-driven selloff that would knock the long GSE exposure. This limits tail loss from fast government intervention while preserving asymmetric upside.