@VIC: Rich Pzena - 'Freddie Mac's the Cheapest Stock I've Ever Seen'

Includes: FMCC, XLF
by: Amit Chokshi, CFA

Fund manager Amit Chokshki attended this week's 3rd Annual New York Value Investing Congress on behalf of Seeking Alpha. Here are Amit's notes from the presentation of Rich Pzena, Pzena Investment Managment:

  • Pzena's talk was entitled 'Evaluating Financials in a State of Panic'
  • The only time good businesses sell for cheap prices is during times of distress
  • Financial stocks are cheap on a P/B basis against historical multiples
  • Freddie Mac (FRE) is the cheapest stock Pzena has 'ever seen':
    • Losses are absorbable and GAAP is not useful in evaluating FRE
    • Pzena believes the mortgage payment resets that result in higher monthly payments will be handled by borrowers because they will be reluctant to forfeit the equity in their homes
    • Fears in the market don’t necessarily impact FRE’s business but are impacting its stock
    • FRE Loan to Value = 60% and are mostly in fixed high credit
    • Believes FRE will follow similar action to P&C insurance companies
      • Hurricane/natural disaster occurs, P&C insurance companies experience losses, P&C companies raise prices/premiums, P&C stock goes up
      • Housing crisis has occurred, FRE and other industry players will raise fees, tighten credit standards, experience lower losses resulting in strong capital returns and thus improving stock price.

See more coverage of the 3rd Annual Value Investing Congress