Paul Mampilly is dropping the sports jacket and putting on his “rebel” clothes, including wearing a meme stock t-shirt and a leather jacket to give himself that edgy look… so I guess we at least can’t accuse him of changing tack, he’s still bullish and positive despite the market’s upheaval this year, he’s still got the “diamond hands” 💎👐 and “rocket ship” 🚀 emojis going for him.

The presentation he started circulating recently is a pitch for his Paul’s Secret Portfolio ($2,495/year, no refunds), which he says is reserved for people who are “willing to go on a bit of a journey” with ideas that “most people are not ready for” — so in his words, it’s an unorthodox research service, which he says “mirrors the strategy he has used for some of his most successful trades, for people who love the thrill of speculating on stocks with truly explosive rocketship potential, people who know that volatility and risk are the price you pay for big, huge, humongous returns.”

And the interview is primarily about those “Rebel Stocks,” which is what Paul is calling “Meme Stocks” that take on a trading life of their own, despite the disdain of the traditional Wall Street folks.

The “rebel stocks” he cites as examples will all sound familiar — GameStop (GME), AMC Entertainment (AMC), Hertz Global (HTZ), Palantir Technologies, Virgin Galactic, Clover Health, half of which are absolute disasters when it comes to their actual business. He even says that he ID’d and traded in a couple of them before the meme stock mania last year sent them to wild heights, though he does confess that he bought GameStop at $4 and sold it in the teens, before the wild run to $400 or so that started a couple months after he sold, and he mentions that he bought AMC for his personal trading along the way as well, it sounds like he was mostly trying to play the “short squeeze” that was driven by the Reddit traders in that one.

The basic argument he makes is that Wall Street has a blind spot to ideas that are simple and revolutionary, but may not fit into anyone’s easy and traditional financial analysis. Which is true, though I’d argue that one reason Wall Street ignores them is that no institutional investor wants to go before his boss or the investors whose money he manages, and justify his investment in a profitless and speculation-driven stock after it has collapsed and gone to zero, as so many such ideas do in the end.

He gives other examples, too, including Mind Medicine (MNMD), which he bet on because he expected the uplisting to drive investor interest, which did eventually happen, Plug Power (PLUG) and Fuelcell Energy (FCEL), opportunities driven by the “hydrogen fuel” story that he thought Wall Street was totally missing but individual investors would appreciate. These are all short term trades, generally a few months, and they all benefitted from the wild speculative fervor of 2020 and 2021, so none of this is the “diamond hands” kind of thinking from the meme stock raiders on Reddit, but they’re the same kinds of ideas — driven by story, without much buy-in from Wall Street analysts (I say “not diamond hands” because Mampilly is saying he sold those stocks with their 300-400% gains, he didn’t just hold on, as so many of the Reddit speculators boast of doing).

But the big pitch, of course, is that Paul Mampilly has some stocks to sell — he says he has found two more “rebel stocks” to recommend to his subscribers, and he lightly hints at them in the presentation.

What does he say? They didn’t provide a transcript, so my quoting might be imprecise here, but this is the basic spiel:

“You couldn’t find two more dominant companies in any industry. These companies completely dominate. a $34 trillion market, but Wall Street has completely written them off. Barely any analytical coverage.

“Both highly profitable businesses, more than $34 billion in profits between these two companies.

“Market capitalization… only $1.5 billion between them. Less than 10% of what they make. These companies rake in tens of billions of profits per year, but Wall Street thinks they’re worse less than a tenth of that.

“For any other industry leader, that would be unheard of. Compares to JNJ, Meta, Netflix, trading at 25, 30, 50X earnings.

“Combined market capitalization is 96% smaller than their profits. Even thouse these two dominate a absolutely critical $34 trillion industry. I know of no other opportunity like this in the market.”

Mampilly also quotes an interview with Matt Kohrs, who is one of the poster children of the Meme stock mania of last year, along with folks like Dave Portnoy and Keith “Roaring Kitty” Gill (who seems to have hung up his claws) — Kohrs quit his job as a coder in February of 2021 to start trading meme stocks, starting with GameStop, and has become an investing influencer with his YouTube Channel… and he, obviously, agrees that this surge of retail trading and “rebel stock” surprises that followed the COVID pandemic is here to stay. He says, “we’re seeing Wall Street shift before our eyes… how stocks are interpreted, viewed, and how people make their decisions, it almost feels like it’s permanently changed.”

Well, we’ll see. That interview was back in December, and it has echoes of the “this time it’s different” claims of enthusiasts during what have so often turned out to be the final burnoff phase of wild bull markets, when the pin pricks the bubble of speculation. Maybe the influence that individual investors enjoyed in forcing some hedge funds into short squeezes and lifting some favored stocks for a time is a one-time thing, maybe it’s the beginning of a new trading paradigm, I don’t know, but at least Paul Mampilly is keeping his foot to the floor with meme stock “bets,” as he claims “the MBA’s have MBA’d themselves out of common sense” when it comes to these stocks that are popular with individual traders.

More from Mampilly:

“The stock market is so damn simple. This new generation of stock market newcomers, our rebel investor millennials, they don’t subscribe to the crappy rules or use the same metrics, they see companies that Wall Street unjustifiably hates like GameStop, and they buy them in droves, and that’s what is extraordinary, the incredible potential of these rocket stocks.”

And then, finally, some more clues:

“The two I’ve found, they’re showing signs they could be next.

“They’ve got a ‘yuck factor’ from the mainstream media. You want stocks where the pros turn their nose up, and stocks that have come down so low they have nowhere to go but up.

“Both under $5

“Couldn’t find two more dominant players in any industry

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“Not tiny niche markets. $34 trillion industry, one of the bedrocks of our economy.”

And then the real clues that clear it all up for the Thinkolator:

“Several years ago, these companies were stolen by the US government. They didn’t get shareholder approval or ask the Congress, they took them over and have used them as their own private piggy bank, take money out whenever they want.

“The Feds have siphoned off more than $300 billion in profits from these two companies. Unheard of.

“Because they already paid back more than $100 billion more than they ever borrowed, the government has no more reason or excuse for holding these companies hostage. It’s really a wild, incredible story.

“The rebel wallstreetbets folks on Reddit are starting to buzz about this already.

“Window starting to close? Maybe. What I think is the govenrment follows through and releases them, then I’m convinced these stocks will jump maybe 1,000%, and it’s gonna happen fast.”

So what are those two new “Rebel Stocks” from Mampilly? Thinkolator sez they are some old favorites from the world of hedge funds and activist investing: Mampilly is pitching Federal Home Loan Mortgage Corporation, commonly called Freddie Mac (FMCC), and Federal National Morgage Association, which is almost always called Fannie Mae (FNMA), the two public-private mortgage securitization companies who are tasked with making the 30 year home mortgage accessible and affordable. Both are huge businesses, reporting billions of dollars in annual income, but are pretty small stocks — they trade over the counter, investors are currently valuing FNMA at about $800 million, and FMCC at about half that.

The history of those two is that they were destroyed in the housing crisis, when home mortgages got a far sight too accessible for people who had no chance of paying them back, and when bankers repackaged those high-risk mortgages to spin dross into fool’s gold. What were once semi-private companies with a government mandate, and an implicit if never really firm government guarantee, were taken over by the government as a “rescue” move during the financial crisis in 2008, and have since then sent all their profits to Uncle Sam.

This drives Wall Street crazy, of course, Fannie Mae was a hugely successful stock in the decades leading up to the crash, profitably churning out the mortgage bonds that investors loved, and boasting a market cap in the $50-80 billion range for years before the bottom fell out in 2008, and there are plenty of logical reasons why the companies should be at least partially re-privatized, putting more private capital into these gatekeepers of the housing market and sharing both the risk and the reward. Both companies are apparently pretty stable now, and earning plenty of money, and have more than repaid the “rescue” funds given by the government.

That has led to almost 15 years of lawsuits and public campaigns by activist investors — the latest big disappointment for FNMA investors was the Supreme Court’s decision last summer, when they mostly sided with the government (Collins v. Yellen, June 23, 2021). Bill Ackman continues to participate in litigation as other cases move forward, and Pershing Square Holdings (PSH.AS, PSHZF) still owns a decent chunk of both Fannie Mae and Freddie Mac shares, he summed up their position in his annual shareholder letter in April:

“Fannie and Freddie suffered large stock price declines of 66% and 64%, respectively, in 2021, primarily driven by a Supreme Court ruling in June that was adverse to shareholders, as we previously discussed in detail in our Semi-Annual report. Shareholders suffered another legal blow in February 2022, when the Court of Appeals for the Federal Circuit ruled decisively against the plaintiffs in the takings cases filed in the Court of Federal Claims, which will end this litigation unless the Supreme Court decides to review the decision.

“Despite these disappointing outcomes in the courts, we believe that the GSEs’ exit from conservatorship remains a question of when and not if, as their role as the irreplaceable core of the U.S. housing finance system is now broadly acknowledged across the political spectrum. Privatization of Fannie and Freddie will ensure that private capital bears the first loss in any future real estate dislocation, rather than having Treasury or U.S. taxpayers bear the risk. As common shareholders, we own valuable perpetual options on both entities that we believe will be worth many multiples of today’s prices once re-privatization occurs. The perpetual nature of these options protects our investment even if Fannie and Freddie do not exit conservatorship for
years. In the meantime, both entities continue to build capital through retained earnings and now have combined capital of $75 billion.”

I wouldn’t argue with that — the private investors in Fannie Mae and Freddie Mac continue to lose in court, but there also continues to be at least some lip service from politicians about eventually re-privatizing those companies to some degree (though strangely enough, even those who are staunchly against “big government” tend to back off when they get to be in charge — it’s hard to give up that flow of cash into the government’s coffers). I see no obvious sign of anything strongly positive happening in the near future, the Biden Administration has shown no particular interest in pushing forward with a partial release of those government-sponsored entities, and has indeed freed those companies to facilitate more loans without getting additional private equity, including authorizing FNMA to re-loosen its standards a little bit buy allowing FNMA mortgages for stuff like vacation homes, an authorization that the Trump Administration had pulled back, with investors thinking at the time that it was just the first step in re-privatizing FNMA and FMCC (there was a lot of speculation that Steve Mnuchin would follow through on promises he and Trump had made for years to unshackle the GSEs as a “on the way out the door” move for the Trump Administration, the shares soared following Trump’s election in 2016 and again during the lame duck months in November and December of 2020, but nothing real ever happened on that front).

You can see the drama of “will they or won’t they” when it comes to political sentiment and court cases in the chart of Fannie Mae over the past decade, after the recovery from the financial crisis, and after a steady drumbeat of losses in court, you can see that investor enthusiasm for these two companies is extremely low right now. They have gotten some Reddit/Meme stock attention in the past, most notably last Spring when a lot of folks were anticipating a much more positive ruling from the Supreme Court (that ruling coincided with the last big one-day drop in the chart, from about $2.25 to $1.25), but I don’t know whether or not there’s a meme mania brewing for FNMA or FMCC these days. Of course, I probably wouldn’t know, even if it was happening, I ain’t the meme-iest guy in the world, but it’s at least not apparent in the share price. FMCC’s chart is essentially identical, and the issues are the same, so you’d have to work pretty hard to argue for one over the other.

So sure, I’ll agree with Paul Mampilly and Bill Ackman that these are “Two stocks with built-in moonshot potential.” Both are tiny little OTC stocks that bear little connection to the large, profitable and essential organizations that those shareholders theoretically own, so there’s obviously the potential for that disconnect to eventually right itself.

But I’ll also note that lots of very smart people have believed that, with admirably stubborn consistency, for a good ten years now, and been perennially disappointed, most recently after being shot down by court decisions in both February and June… if you believe that share prices represent sentiment, then this is as pessimistic as investors have been about Fannie Mae and Freddie Mac since March of 2013. There hasn’t been any positive movement in favor of those shareholders from either courts or regulators or legislators in years. Maybe that changes, maybe the next election or the next court case will begin to turn the tide, or maybe gravity keeps pulling those shares lower, I’d have to flip a coin to give you my forecast about that. I do have some money invested in Pershing Square Holdings, so when it comes to my money I’ll just let Bill Ackman fret over those in my stead — I don’t feel the need to get more leverage on those potential “moonshot” rebel stocks.

Sound like the kind of “rebellion” that’ll get your juices flowing? Ready to leave it to Ackman and Mampilly to wait on the Feds? Have other favorite meme and “rebel” stocks that you prefer, or think will be the Text Pigs Sing, as we hep-cats used to say in the ’90s? Let us know with a comment below. Thanks for reading!

P.S. We haven’t heard from subscribers to Paul’s Secret Portfolio about how they feel about the service, so if you’ve ever been a subscriber for that one please click here to pop over to the Paul’s Secret Portfolio review page and let us know how it’s going for you… other readers are curious. Thanks!

Disclosure: Of the companies mentioned above, I own shares of Pershing Square Holdings. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.