Freddie Mac (FRE)

FRE's current share price reflects investor panic and not the economic value embedded in this world class franchise. While it's book value has been cut, FRE's returns on new business have increased remarkably, paving the way for higher normalized earnings power over the next cycle...and making this business, at current prices, absurdly cheap.

Valuations like today's, especially for wonderful businesses like FRE, only arise when investors have given up on a company and have concluded that the current environment is permanent...it's not. The phrase be greedy when others are fearful, and fearful when others are greedy comes to mind.

FRE's augmented profitability going forward should more than make up for past losses as current mortgage market turmoil plays itself out over the next year or two. The current environment actually favors Freddie and Fannie over all other mortgage participants. They are able to command significantly higher prices in their credit guarantee business, not to mention that their retained portfolio contains only the highest level of credit quality, which going forward is likely to create a steady increase in book value (which is also likely to be considerably higher than its current mark to market value).

Let's not forget that their government charter gives them the unique ability to issue long term callable debt, enabling them to accurately match the duration of their investments in mortgages with their liabilities. The result is sustainably high long-term ROE's.

The bottom line is that Freddie (with the exception of Fannie) possesses unscalable barriers to entry, and generates above average earning power during normal times, which common sense dictates is likely to only get stronger as current competition is nearly non-existent...Those with the patience to wait should be rewarded with returns approaching 100% from todays prices within 2-3yrs