Two giant corporations were driven to the point of insolvency in 2008 due to massive losses they incurred during the financial crisis of that Fall.  The federal government took control of these disasters because their imminent demise would cause a serious threat to the to the United States economy.  As added problems, they have been forced to turn over any profits they make to the U.S. Treasury as a condition of the government takeover…all profits earned by Fannie and Freddie go directly to the U.S. Treasury as a part of the receivership agreement.  Even worse, there is legislation being considered that would dismantle these companies, rendering any outstanding stock virtually worthless.  A few years later, if you were asked to invest in these corporations, you would probably go running for the hills, absolutely certain any money invested in them would never be seen again.  You may have even questioned how any broker recommending them could keep his (or her) license?  Apparently, a number of billionaires disagree, seeing huge potential profits.  How can that be?

Well known hedge fund managers, Bruce Berkowitz and Bill Ackman, as well as famous activist investor Carl Icahn have all bought substantial stakes in Fannie Mae and Freddie Mac.  Since billionaires don’t get rich by making stupid business decisions, something they know (that we don’t) must be going on here.  Evidently, they have decided that the intrinsic value of these companies is far greater than the market currently trades them at.

Last year, hedge fund manager Bruce Berkowitz, purchased a huge stake in Fannie Mae and Freddie Mac with his Fairholme Capital Funds.  Berkowitz has already doubled his money in one year, following his recent $51 million sale.  Not a bad return for anybody in the securities business.  Profits like that are incredibly rare, no matter how much you have been making.  Smart money moves like this are the way people become billionaires.

In November, the Pershing Square hedge fund, run by the activist investor, Bill Ackman, invested half a billion dollars which gave him stakes of nearly 10 percent each in Freddie and Fannie.  Ackman certainly appears bullish on Fannie and Freddie’s future, recently saying he believes Fannie Mae stock could be worth as much as ten times its current price in the coming years.  He is predicting a potential of as much as 1,000% – yes, ten times his original investment within the next several years.  If you can afford to take a big risk, and he certainly can, why stay on the sidelines?

Well known billionaire investor Carl Icahn recently joined the party, purchasing a $51 million stake in Fannie and Freddie’s common stock from Berkowitz.  Icahn is known for making huge bets on companies and then pushing for management changes. $51 million may seem like a huge amount to you and me, but it is smaller than many of Icahn’s other investments.  His bets have obviously worked out well much more often than not.  Considering the huge profits to be made, Icahn believes it is worth the risk.  This looks like it could be another successful endeavor.  Fannie and Freddie now appear much healthier than they were previously, posting substantial profits for the first quarter of 2014.  The company was considered worthless less than six years ago.  Who finds gems like this?  Well, maybe Carl Icahn.  Perhaps this isn’t as big a gamble as he has made in his very successful past.

Berkowitz is certainly not bailing on the companies.  Despite selling the $51 million in common stock to Ichan, he still holds a $1.3 billion position in Fannie and Freddie.  Since the share price has more than doubled since he made his initial investment this sale locks in some large profits. He also seems to be reasonably optimistic about their future.  Even if Fannie and Freddie were to be restructured, as he has suggested, holders of the common stock would benefit.  He seems to be taking a more cautious approach than Ackman and Icahn, but Berkowitz is still heavily involved.

What about some of the potential downsides?  Berkowitz and some other huge investors aren’t sitting idly by while nearly all of the profits are being transferred to the Treasury.  They have filed a lawsuit which alleges the bailout arrangement unlawfully requires Fannie and Freddie’s huge profits to be paid to the government.  They allege that this action is illegal as it unduly impairs shareholder value.  The fund’s firm and other shareholders are pushing the U.S. to return the companies to private ownership, saying shareholders should benefit from their holdings.  This would lead to even bigger profits for the large investors.

Ackman appears to be confident of the lawsuit’s outcome.  He recently said he “is convinced shareholders will win their lawsuits against the U.S. government that challenged the Treasury Department’s bailout agreement with the two companies.”(The Wall Street Journal)

A recent statement from the judge presiding over this litigation would seem to back up his assertions.  When she ruled against the Justice Department in a dispute about its allegedly withholding evidence, Judge Sweeney recently indicated that she may side with Fairholme, saying she probably has a broader view of her order than that of the Justice Department, according to court proceedings. (Financial Times)

Another potentially serious risk is the government’s continuing efforts to shut down both companies, which would effectively leave shareholders with nothing.  The proposed legislation would liquidate Fannie and Freddie and give all proceeds from the sale to the Treasury.  Such a serious danger would seem to give any investor pause.  However, this potential catastrophe appears more and more unlikely.  It is becoming increasing clear that the mortgage insurance companies aren’t going anywhere.  The government is loath to discontinue any popular programs unless it is absolutely necessary.  Mortgage guarantees appear to be no exception to this rule.

Fannie Mae and Freddie Mac currently own or guarantee nearly 60% of all the U.S. residential loans.  These loans are then packaged into mortgage backed securities (MBS) and sold to investors.  Therefore, any plan to close them could again lead to a further, even more serious housing crisis.  In its most explicit acknowledgement yet that the government cannot scale back the GSEs, Mel Watt, the new director of the Federal Housing Finance Agency and lead regulator for mortgage insurers announced that the size of loans approved for purchase would not be reduced. (Morningstar)

Government action has helped precipitate much of the recent financial crisis, and even lawmakers have little appetite for creating more problems.  The potential for creating even more difficulties is a great reason to avoid taking away something many people have come to rely upon.  Now that Fannie and Freddie are turning a nice profit, leaving them alone looks like the government’s best move.

Despite this good news, all is not necessarily safe.  The most serious risk is a warrant issued to the Treasury by Fannie Mae in 2008 that gives it the option to purchase an amount equivalent to nearly 80% of the common shares outstanding for just one-thousandth of a cent per share, or $0.00001.  The warrant can be exercised at any time between now and Sept. 7, 2028.  In a dramatic case of understatement, this would, in Fannie’s words, “substantially dilute investment of current shareholders.”  This would essentially make the current investment practically worthless.

Although Washington is not likely to close down the mortgage insurance business, it doesn’t want to spend the money to take it over completely, either.  Perhaps the billionaires, who despite some politicians may say, are really the people who know what they are doing and will be allowed to manage things properly.

The billionaires apparently believe the huge potential profits justify this risk.  A return of more than ten times the original investment is too good for them to resist.  The dangers now appear far less serious than they did just last year.  Based on recent indications, it looks like their judgment is likely correct.  Taking these types of risk are how people become billionaires.  If you’ve got an iron stomach, a play in FNMA and FMCC might just pay off.

DISCLOSURE:  We do not currently have a position in FNMA or FMCC; however may take a position in it as early as 23 Jun 2014 or at a later date.  We find these investments have a great deal of risk, but also see a large upside should the courts rule in favor of the Fannie and Freddie stock holders.

According to SemRush.Com web traffic statistics, the Delia’s web website began attracting 30% more traffic than it had seen in the recent past.  This should bode well for fourth-quarter2013 sales and operating results.  It would seem that other investors have taken notice of this as well.  On January 27, 2014, Roice and Associates LLC filed a 13G, disclosing a 3.77% stake in the company, by purchasing roughly 2.6 million shares near the end of December.

In addition, it would appear that Mr. Cooperman has not reduced his position in Delia’s and is holding strong during what appears to be a recent sell off.

Delia’s reached a daily low of $.74 per share on 28 January 2014. Since Mr. Cooperman purchased his shares at an average cost of $1.19 per share, Delia’s appears to be trading at a fairly significant discount today.  In addition, Delia’s CEO, Tracy Gardner, maid an open-market purchase of 10,000 shares as disclosed on a form 4 filing on December 10, 2013, at an average price of $1.01 per share.

That said, based only on web traffic, I’d expect Delia’s to report increased sales of at least 25 to 30%.  Potentially more, if foot traffic also improved during the holiday season.

Since we saw a billionaire buy in early November, a CEO insider buy in early December, and a large block purchase in late January by Roice and Associates, Delia’s just might be a “buy” for the right investor.

Of course we’ll have to see the final 4th quarter and annual report for 2013 to see how they really did, but on the surface it doesn’t look too bad.

Disclosure Statement:  Based on the above information, we currently have a long position in DELiA*s and may take a larger position in the company during the next 48 hours.

On January 10, 2014 Seth Klarman (Baupost Group) acquired 2.9 million shares of Kindred Biosciences at an average cost of $11.17 per share.  This represents 17.93% of all the outstanding shares of the company.  Kindred is a development stage company developing pharmaceuticals for the pet industry.  Its flagship product is a drug called CereKin, a beef flavored dog chew that treats dogs with osteoarthritis.  Its other products include “AtoKin” which treats dermatitis in dogs, and SentiKin for postoperative pain.  Kindred also has numerous other drugs in its pipeline and maybe the reason Klarman has taken such a large position in the company.

On the news, shares of Kindred closed at $12.75 on January 10, 2014.  The shares now appear to be in overbought territory making the shares ripe for short sellers.  Kindred’s IPO was initially priced at seven dollars per share in December 2013.

Disclosure:  We currently do not have a position in Kindred Biosciences and do not plan to acquire shares within the next 72 hours.

Carl Icahn responds to question In NYC.

Carl Icahn operates a $29.7 billion portfolio that yields some of the best returns among all billionaire investors.  From October to December he’s managed to yield approximately a 23% return for him and his investors.  His latest purchase includes Nuance Communications where he acquired shares of the company in mid December 2013 for approximately $14.15 per share. Since acquiring the shares, Nuance is trading at $15.34 per share.  He currently owns approximately 60,000,000 shares making this transaction worth approximately $60 million in short-term gains.  Carl isn’t a new to this company, in fact he’s bought shares of Nuance in the past at an average share cost of $19.20 meaning he’s bearish on the company, and is currently in a losing position.

Nuance is the market leader in voice recognition software and is positioning themselves with new and innovative products. Their market cap is over $4 billion and they have recently been seen going after the medical community niche.  While there has been some criticism about overpaying executives within their company, many analysts believe Nuance will perform very well as we move forward.

The writers of this article currently do not have a position in Nuance Communications, nor do they intend to take a position in this company within the next 72 hours.

His largest holding today is Wells Fargo  (WFC).  Wells Fargo represents approximately 20% of  Mr. Buffett’s  portfolio where he acquired shares at an average cost of $37.49.  Since shares are now trading at $45.34, this represents a gain of 21%.  Since Wells Fargo is now fully valued we wouldn’t be surprised to see Warren Buffett  begin to decrease his position in the bank since his 20% gain threshold has now been met.  Still there might be some upside potential with Wells Fargo,  so Mr. Buffett may be seeing this as a longer-term investment with potential growth in earnings.

In addition to Wells Fargo, Warren Buffett appears to be very bullish on Coca-Cola (KO),  IBM,  American Express (AXP), Procter & Gamble (PG), Walmart (WMT),  Exxon Mobil (XOM), U.S. Bancorp (USB), DirecTV(DTV), Davita (DVA), Moody’s (MCO), and Phillips 66 (PSX.)

Coca-Cola represents 16 percent of Warren’s portfolio, IBM represents 13%,  American Express represents 12%, Procter & Gamble represents 4%.

Other holdings in the Buffett portfolio include General Motors (GM), Conoco Phillips (COP),  Bank of New York Mellon (BK), National Oilwell Varco (NOV),  Chicago Bridge and iron Company (CBI), Suncor Energy (SU),  Viacom (VIAB), M&T Bancorp (MTB),  VeriSign (VRSN), Costco (COST),  USG Corporation (USG), Precision Cast Parts Corporation (PCP),  WABCO Holdings (WBC),  Deere & Company (DE),  Torch Mark Corporation (TMK), Visa (V), MasterCard (MA),  Sanofi (SNY),  Starz (STRZA),  Verisk Analytics (VRSK), Media Gen (MEG) , Johnson and Johnson (JNJ), Dish Network (DISH),  Mondelez (MDLZ), Glaxo Smith Kline (GSK),  General Electric (GE), Kraft Foods (KRFT), United Parcel Service (UPS),  and Lee Enterprises (LEE.)

Recently Mr. Buffett has been seen purchasing shares of DaVita Incorporated on November 8, 2013 for an average share price of $55.14 and again on  December 12, 2013 for an average share price of $58.24 .  In addition Warren has  exercised shares of USG Corporation for an average cost of $11.40, which I’m sure he will begin a sell off in the open market  for a tidy profit.

Overall, the Buffett portfolio represents a true blue chip position in the market.  A grouping of stocks that should perform very well into 2014.   As his positions change, we will keep you updated  on Warren Buffett and the Berkshire Hathaway group.

Warren Buffett still smiling after $1B portfolio hit.

Warren Buffet’s portfolio was reported to have lost almost a billion dollars last weak as the market trended downward hitting some of Warren’s top holdings.  While everyone knows that you only lose if you sell at a loss, Mr. Buffett lost a significant chunk of “what could’ve been”…  His biggest hit was IBM which started the week at $210.44 and fell to $190 at Friday’s close, representing a $1.3B loss to his portfolio.  His next biggest loser was Bank of America which began the week at $12.19 and finished at $11.66.  He currently holds 700 million shares of BOA and obviously believes in the long term prospects of the company.

Source:  Fool.com

Carlos Slim Helu:  The Mexican business tycoon and philanthropist ranked as first richest person of the year in 2012. He has been ranked first for the past 3 consecutive years.  He’s 72 years old and owns business’ worth $69.0 billion. The main source of his wealth is through Telemex, Grupo Carso and America Movil companies.

Bill Gates:  William Henry Bill Gates III born on the 28th of October 1955. The legend of computers, chairman of Microsoft, the world’s largest company of computers and software.  For the past several years he has been consistently among the top richest men in the world.  His net worth is reportedly $61.0 billions and he is 56 years old.

Warren Buffett:  One of the American business tycoons born on 30th August 1930.  He’s one of the most successful investors of the 20th century.  Currently he’s the chairman, the main shareholder, and also the CEO of Berkshire Hathaway.  He’s considered as by many to be one of the most influential people in the world. Warren’s net worth is $44.0 billion and he is 81 years old.

Bernard Arnault:  French business man born on 5th of March, 1949.  He is 63 years old and worth $41 billion.

Amancio Ortega Gaona: One of the biggest fashion executives in Spain and the chairman of the Inditex, a Spanish company of fashion clothing. He is 75 years old and is valued at $37.5 billion.

Lawrence Ellison:  An American business man born on 17 August, 1944.  He is the chief executive Oracle Corporation and has a net worth of $36 billion.  Mr. Ellison is 67 years old.

Eike Batista: This Brazilian business man was born on November 3rd, 1956, and made his fortune from mining, oil and gas exploration. Currently, the chairman of EBX Group with an estimated wealth of $30.0 billions at the age of 55.

Stefan Persson: The Swedish business man is the chairman and main shareholder of fashion company H&M.  He is valued at $26.0 billion and is 64 years old.

Li Ka-shing: One of the business men of Hong Kong, known as Asia’s richest, born on June 13th, 1928.  Worth $25.5 billion. Source of wealth is Cheung Kong Holdings and his age is around 83.

Karl Albrecht:  One of the richest business men in Germany, born on February 20th, 1920. The lead founder of supermarket chain Aldi. Currently he has been estimated at a net worth of $25.4 billion and his age is 92.