Regal Point Explains Long Fannie Mae, Short NQ Mobile Thesis

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We’re used to hearing from managers at the largest hedge funds, Pershing Square’s Bill Ackman or Carl Icahn, traders with billions at their disposal who can show up in the headlines or build enormous buzz, like Ackman did this summer with his Herbalife Ltd. (NYSE:HLF) short, pretty much whenever they want. But as soon as they make a high profile bet, other hedge funds will line up for or against them as their thesis moves through the market.

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We got to talk to Vijay Marolia, managing partner and chief investment officer at Regal Point Capital Management, about why he decided to take a position on NQ Mobile Inc (NYSE:NQ) and Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA), turning two controversial positions into his growing hedge fund’s largest short and one of his largest long positions.

NQ Mobile is a binary situation: Regal Point’s Marolia

“I see NQ Mobile as a binary situation, it’s either white or black, there’s no half pregnant,” says Marolia explaining why he is unimpressed with the non-binding buyout offer from Bison Capital Holding. “If it’s a legit company with the actual growth rate and revenues that it’s claiming to have it’s worth way more than that $9.80, but if it’s not than it’s worth less than a couple bucks a share.”

When Muddy Waters Research released its short thesis last year, Marolia already had NQ Mobile Inc (NYSE:NQ) on his watch list, but as a potential long position. Like most investors he was impressed with the company’s growth, but that was based on taking NQ’s quarterly earnings at face value. After the Muddy Waters report hit, he was convinced that something was probably wrong. It wasn’t so much the false cash allegations, which Marolia says is beside the point, but the fact that he no longer believes in NQ’s overall narrative.

“Nobody really knows what NQ Mobile does, how they make their money, or where they get it from… the story just does not make sense,” says Marolia.

Marolia would have expected stronger market reactions to NQ Mobile Inc (NYSE:NQ)’s decision to replace PricewaterhouseCoopers Zhong Tian LLP with Marcum Bernstein Pinchuk LLP as its independent auditor or the departure of its CFO, but it hasn’t shaken his conviction in the position. That NQ is even considering the $9.80/ADS offer from Bison tells him that management is worried, otherwise they would never entertain such a lowball offer.

“I think every quarter more and more is going to come to light, so it’s pretty much a waiting game,” he says.

Regal Point building a position on Fannie Mae

While Marolia first heard about the NQ Mobile Inc (NYSE:NQ) short by reading Muddy Waters report like the rest of us, he was convinced to take a position in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) after having a conversation with Bruce Berkowitz of Fairholme Capital. Late last year Berkowitz gave a talk at Rollins College, where Marolia earned his MBA and serves on the alumni board, and the two got to discussing Fannie Mae at a meet and greet afterwards.

He initiated the position with preferred shares, but as his conviction grew he started building a position in Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) common stock, making it a top three position for Regal Point if you include both common and preferred, and he has no intention of backing down.

“As part of regular portfolio management we’ll trade around a position. We will have multiple shares, or options in NQ Mobile’s case, and we will take some profits here, add back to the position,” says Marolia. “With Fannie Mae, we are building a position. I am not doing a lot of trading around that, I am not planning on taking my profits anytime soon.”

Marolia doesn’t think that a political solution to the Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) impasse is realistic. He compares it to the tax code, which everyone agrees needs to be fixed, but with so many conflicting views the odds of anyone finding a workable compromise are practically zero.

“It all comes down to that third amendment, the legal sweep… and it seems that the law is on our side. That third amendment qualifies as self-dealing,” says Marolia. And if he gets the ruling that he expects, Marolia expects that Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) common stock could easily jump fourfold over their current low prices.

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