(FORTUNE Magazine) – Fidelity legend Peter Lynch once opined that one of the biggest mistakes investors make is assuming a beaten-up stock can't go any lower. Owners of Fannie Mae (FNM) have learned that lesson all too well. A drumbeat of criticism from Alan Greenspan and the Bush administration--combined with the drip-drip-drip of accounting investigations and revelations--has driven the stock of the government-sponsored mortgage company from $77 a share in February 2004 to $45 on Sept. 30.

This time around, the stock may have finally hit bottom. Fannie is now trading $5 below where UBS analyst Eric Wasserstrom pegs the liquidation value of its mammoth mortgage portfolio. In a worst-case scenario, in which Fannie essentially ceases operations and lets its portfolio run off over ten years, he thinks it is worth $50 a share. Wasserstrom does not expect that to happen: His own target price for Fannie is $88. Only slightly less optimistic is David Dreman of Dreman Value Management, who thinks the stock is worth $75. "That's the earnings power once they're through the scandal," says Dreman, whose firm owns about eight million Fannie shares.

Near term, those earnings will be constrained as Fannie reduces its mortgage portfolio to comply with stricter capital requirements. Banc of America analyst Robert Lacoursiere, who rates Fannie a sell, is predicting a 37% drop in earnings in 2005, followed by a 1% increase in 2006. Another immediate concern is the Government-Sponsored Enterprise reform bill now being debated by Congress. The Senate version would restrict the growth of Fannie's mortgage portfolio, but it's doubtful that such a provision will make it into the final bill. As Morgan Stanley analyst Kenneth Posner contends, "With the economy appearing to weaken and the housing market starting to show signs of deceleration, now is not the time when legislators would want to withdraw liquidity from the mortgage market." -- Jon Birger