Bill Miller has increased his stake in FRE and now owns 12.2% of the company. Besides Bill Miller, other smart managers such as Richard Pzena, Charles Brandes, David Dreman and others are long on FRE.
On the other hand, there are smart people like Bill Ackman, Whitney Tilson and others that short FRE.
Being an amateur investor myself, it is scary to see very smart people on different side of the bet. My knowledge is too shallow to analyze the complex FRE and the severity of housing slump.
However, I have been thinking.....
If Miller, Pzena and Dreman were right, the earning power would be $3 - $5 per share 2 to 3 years out. Using PE of 10, FRE would worth $30 to $50. Let's say $30. At current price of $4, that is a 7.5-fold increase.
If Ackman and Whitney were right, FRE would worth 0.
Assuming 50% chance of 7.5-fold increase and 50% chance of going to 0, the expected value = $15 per share.
With such a high positive expected value of $15, this seems like a potential good bet.....?
What is your thought on the above? Shoot me an email.
P.S. Actually, I think the LONG CASE has higher probability than the SHORT CASE. Combined Miller's, Pzena's and Dreman's ages > combined Ackman's + Whitney's ages. :)
This is only a mental exercise...
DISCLOSURE: No position
This is only a mental exercise...
DISCLOSURE: No position
3 comments:
Dear David,
I saw another post discussing the bet on Freddie on August 29, and i leave the comment below to the author,
"I have a question here, which is 'Do you really understand the risk involve with Freddie Mac's subprime and derivative exposure ?'
If not, how do you assess the intrinsic value of it? "
The blog add.
http://valueinvestorhaven.blogspot.com/2008/08/freddie-mac-heads-i-win-big-tails-i.html
I feel that i am not able to understand that two companies with my shallow knowledge, so i choose to step away..
Combined Non-Value Investors' ages >>>>>> Value Investors' ages.
But we both know the answer.
Cheers,
Sechai
Dear SeChai,
Freddie and Fannie are below my circle of competence. It would be easier to look for one-footer than seven-footer.
My comment on Freddie is just an exercise of thought.
Best,
David
Dear David,
Don't be misunderstanding, i am just putting my comment on another post here.
You are really humble and nice, i do understand that is just an exercise of your thought. There is really many things i can learn from you and i am really happy to meet you.
Best wishes,
SeChai
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