In past, we have written blogs on zombie stocks like Lehman Brothers (LEHMQ.PK) and Washington Mutual (WAMUQ.PK). Most zombie stocks eventually go to zero because they are usually close to or in bankruptcy.
However, the low priced stocks are usually some of the most active and liquid names in the entire stock market. Today though, it seems Fannie Mae (FNMA.OB) seems to have taken the zombie throne. The volume of shares of Fannie Mae has been insane. The average volume for the stock for the last three months is just under 30 million.
Despite many experts and analysts predicting that Fannie Mae will eventually go to zero, some short term traders have done well in the shares. Even though Fannie Mae has a household name, most of the volume comes from retail investors. There may some hedge funds that trade the stock, but institutions usually stay away from situations like FNMA.
The mortgage and housings markets are improving, but are still shaky. The government’s huge stake in both Fannie Mae and Freddie Mac are evidence of this. But common sense tells me that there is a need for a company like Fannie Mae to exist. I think this rationale draws some people to the stock. The holders are basically playing a lottery ticket and hoping for some changes out of Washington. Some sort of proposal could be in Congress by January.
In the meantime, there will be several days to buy and sell these hot penny stocks. The strong volume should continue into the later part of the year, in anticipation of a final decision. Seasoned penny stock flippers should benefit play volume surges and technicals, but others will surely be big losers.
We mention risk often in our blogs and how to deal with it. If you decide to day trade FNMA remember to take profits and implement a risk/reward ratio into your trade. Remember that there are people who make a handsome living trading liquid low priced penny stocks.
If you are a longer term investor and you decide to take a flier on Fannie Mae, only invest what you can afford to lose. The best mentality is to act as if the investment is a lottery ticket. Because that’s what it is. Just remember, that trading zombie stocks are like playing musical chairs. Just be sure to be sitting in one when the music stops.