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Why you should follow Icahn into Fannie and Freddie

Why you should follow Icahn into Fannie and Freddie

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There’s a hedge fund party starting in Fannie Mae and Freddie Mac.

And the latest member to get in on the fun is billionaire investor Carl Icahn, who joins a number of other high profile investors to the likes of Bill Ackman of Pershing Square and Richard Perry of Perry Capital.

According to a recent court filing, Icahn purchased 6.8 million shares of Fannie Mae at $4.03 each and 5.7 million shares of Freddie Mac at $4.04 in March from Bruce Berkowitz’s Fairholme Fund.

(Read: Icahn bought $51 mln in Fannie, Freddie shares - filing)

And Icahn seems to have the magic touch, as shares of both troubled mortgage giants were up around 3 percent, respectively, on Tuesday following the reports.

So, should you follow these hedge fund honchos into Fannie and Freddie?

“Quite frankly, I’d rather make a bet on the Stanley Cup than make a bet on these stocks,” joked Erin Gibbs of S&P Capital IQ, who compared Icahn’s acquisition of Fannie and Freddie shares to gambling, rather than investing.  

(Watch: Carl Icahn acquired Fannie, Freddie shares from Fairholme: Filing)

“I see this as a very speculative play. This is really a repeat of the story we saw back in March where we saw that a bill was proposed to wind down Fannie and Freddie over the next five years,” said Gibbs. “It’s really about whether the government is going to step in or let it go to the private sector.”

Although Gibbs doesn’t view either company as an investment option, she noted that improved earnings per share in Fannie Mae shows that it is on the road to profitability at a faster pace than Freddie Mac.

According to Richard Ross of Auerbach Grayson, Fannie Mae’s charts also show room to grow.

“Technical analysis is founded on the belief that history repeats itself and if past is indeed prologue, I think the stock is going significantly higher in the short term,” said Ross.

Ross pointed out two bullish ascending triangles, which project a measured upside to around $6.85 per share.   

“I know it’s speculative, I’m with Erin on this one, but I think the risk is right in line with the reward here.”

His advice, “manage your position size, keep it small.”

Check out the video above for Tuesday’s full discussion on CNBC’s “Street Signs.”

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