Optimism sends Fannie, Freddie shares soaring

Investors are looking to piggyback on a rally in bailed-out financials, say analysts. But it's doubtful the mortgage giants will fare as well long term.

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NEW YORK (CNNMoney.com) -- Shares of bailed-out mortgage finance giants Fannie Mae and Freddie Mac soared Monday, as investors try to piggyback on a rally in shares of government-backed financial companies.

Fannie (FNM, Fortune 500) shares rose nearly 50% in afternoon trading, while Freddie (FRE, Fortune 500) jumped almost 30%.

The mortgage giants' Monday rally was sparked in large part by a jump in the shares of companies like AIG (AIG, Fortune 500) and Citigroup (C, Fortune 500), said Paul Miller, analyst at FBR Capital Markets and Co.

"People see the financial stocks rising, and they say, 'Oh, the government has a piece of them, and they're doing well,'" Miller said. "Investors are speculating that Fannie and Freddie will follow suit."

Of course, in July 2008, Fannie and Freddie became the beneficiaries of what has become the biggest government bailout to date. Fannie has since received $34.2 billion of direct government aid, while Freddie has received $51.7 billion.

But there is a big difference between the mortgage giants and the financial outfits that are bouncing back, according to Miller Tabak & Co. analyst Thomas Mitchell. Investors can "actually make a case" for the upswing in shares of some of these finance companies.

AIG, which has received $182 billion in aid, saw its shares jumped 30% last Thursday. The insurer has paid about $100 billion back to the government, and has agreed to spin off three large chunks of its business, selling stakes in two of them to the Federal Reserve. When that deal is finalized, the insurer's loan will be reduced by another $25 billion.

As for Citigroup, "the odds are 100% that it will survive," Mitchell said. "The only question is whether it will stay at 34% government-owned. Either way, they'll still be around." But the same can't be said for the mortgage giants.

Investors hoping Fannie and Freddie will make a similar turnaround will likely be disappointed, said FBR analyst Miller. "Make no mistake: There is not a lot of value in these shares," he said, adding that this trend will likely "play itself out" very soon.

Mitchell agreed, and said that it's unlikely that Fannie and Freddie shareholders "will end up with anything of value." He thinks that their shares are probably only worth about 5 to 10 cents.

"As long as these stocks keep trading, they will probably be susceptible to speculation," Mitchell said. "It's not reasonable, but it happens all the time -- and a lottery ticket is still a lottery ticket." To top of page

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