Billionaire Bill Ackman Thinks This Stock Could Skyrocket 500%. Why Does Wall Street Expect It to Plunge?
Saturday, Feb 1, 2025 5:58 am ET
GOOG --
Billionaire investor Bill Ackman, CEO of Pershing Square Capital Management, has made a name for himself by identifying undervalued stocks and pushing for strategic changes to unlock shareholder value. In a recent interview, Ackman expressed his bullish stance on two government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, predicting that their stocks could potentially skyrocket by 500%. However, Wall Street analysts have a more pessimistic outlook, expecting the GSEs' stock to plunge. This article explores the reasons behind Ackman's optimism and the contrasting views of Wall Street analysts.

Ackman's bullish case for Fannie Mae and Freddie Mac is based on several factors:
1. Exit from Conservatorship: Ackman envisions a path where the GSEs are credited for their previous distributions to the Treasury Department under the net sweep agreement, which would then retire the senior preferred stock. This would allow the GSEs to exit conservatorship and recapitalize, leading to significant shareholder gains.
2. Lower Capital Requirements: Ackman estimates the value for both Fannie and Freddie to be around $34 per share, assuming they raise capital in the fourth quarter of 2026. This is based on a 2.5% capital requirement, which he believes would create a fortress balance sheet that could have covered roughly seven times the losses Fannie and Freddie incurred during the Great Recession.
3. Strong Earnings Power: The GSEs have strong earnings power, allowing them to accumulate capital quickly. Ackman assumes they would need another $30 billion to hit their 2.5% capital requirements by the fourth quarter of 2026.
4. Potential for Significant Shareholder Gains: If the administration truly wants to exit the GSEs from conservatorship, it will likely need to make concessions on the senior preferred stock or warrants. This could lead to significant shareholder gains, as the Treasury could cash their warrants and sell down the common stock over five years, netting a profit of $300 billion.
Wall Street, however, has a more pessimistic outlook on the GSEs. The Congressional Budget Office (CBO) ran scenarios about the GSEs exiting conservatorship in 2020, and the lowest capital requirement used was 3%. It's also not clear the Treasury would apply old distributions to the senior preferred stock. Therefore, Wall Street expects the GSEs' stock to plunge, while Ackman sees potential for a significant increase.
Ackman's investment philosophy and track record significantly influence his bullish stance on Alphabet (GOOG, GOOGL), despite differing opinions from Wall Street analysts. Here's how:
1. Long-term focus and limited portfolio size: Ackman is known for holding a limited number of stocks for the long term, focusing on companies with limited downside potential and recurring cash flow. Alphabet, with its dominant market position in search and growing presence in cloud and AI, aligns with this strategy.
2. Value recognition: Ackman believes in buying undervalued stocks and pushing for changes to unlock shareholder value. He sees Alphabet as undervalued, given its strong fundamentals and growth prospects in AI and cloud services.
3. AI and cloud growth opportunities: Ackman is bullish on Alphabet's AI and cloud growth prospects. He believes that AI, particularly generative AI, will provide a significant growth opportunity for Google Cloud. In the second quarter of 2024, Google Cloud revenue soared 29% to $10.3 billion, and its operating income nearly tripled year over year to $1.17 billion.
4. Market dominance and competitive advantage: Ackman appreciates Alphabet's market dominance in search and its competitive advantage in data, which it uses to train AI models. He believes that Alphabet will be a dominant player in AI for the long term.
5. Track record of successful investments: Ackman's track record of successful investments, such as Chipotle (CMG) and Nike (NKE), demonstrates his ability to identify undervalued stocks with significant upside potential. His confidence in Alphabet is likely bolstered by his past successes.
In conclusion, Bill Ackman's bullish stance on Fannie Mae and Freddie Mac is based on several factors, including the potential exit from conservatorship, lower capital requirements, strong earnings power, and the potential for significant shareholder gains. However, Wall Street analysts have a more pessimistic outlook, expecting the GSEs' stock to plunge. Ackman's investment philosophy and track record also influence his bullish stance on Alphabet, despite differing opinions from Wall Street analysts. Investors should carefully consider the arguments presented and make informed decisions based on their own research and risk tolerance.