First, listen to Wall Street say, “It’s gotta come back.”
Then, ask yourself the subtext: Is it coming back for real reasons or because very-short-term traders assume it is coming back?
Finally, are “value” investors looking at the stock as a grand bargain over the next five years, forgetting that timing in life is everything, from stocks to meeting your spouse?
Citigroup (C) fits this description:
- Wall Street thinks the stock can trade back up to the mid-$30s — it is around $27 — simply because it is a trading vehicle with hundreds of thousands of options contracts outstanding. I am talking about yearend 2012, not tomorrow.
- With short-term traders looking at charts, I am looking at fundamentals and they are lousy. Citi is a terribly managed company in the middle of a growing slowdown in the U.S., recession in Europe and a recession to hit Asia by the middle of the year. Management brags about how it is growing in markets around the world; well, most of them are slowing or will slow this year.
- The company has an opaque balance sheet, monstrous off-balance-sheet obligations that are technically not obligations but should be seen as such, and continuing exposure to mortgage and commercial property problems. Profits in 2011 were sustained with reductions in loan loss reserves, perfectly legal, making even profit analysis opaque. With the economy softening, and mortgage delinquency rates at 6% (the historical average is 1.5%-2.0%), loan loss provisions will rise.
- Value investors thinking very long term are looking at the breakup value of the enterprise, ignoring that the balance sheet is so complex it is probably not possible to break up – or get regulatory approval – to break up the company. And if broken up, some of the pieces cannot do very well or survive without the Citi brand or the foundation of the insured deposit base. Admittedly, announcement of a breakup would boost the stock, but over time I believe the parts are worth less than the current value of the company.
Citigroup’s weak chart
The charts do not help either. Citi is a very large player in a very weak sector, no help from the ETF or index traders, and the chart is very weak short term.
I have followed Citigroup since late 2007 and the stock, split adjusted, was $430 and change. It is now $27 or so. Meredith Whitney, the doyen of banking analysts but at the time relatively unknown, was holding forth in the makeup room at Fox Business and I don’t think I was ever quieter in my life – her life had just been threatened for saying the company would cut its dividend and the stock would take a hit. The one-year chart says short term there is room to fall so even if you are not thinking longer term, you may actually be looking at a short possibility.
Possible upside catalysts? The biggest would be restoration of the company dividend. That dividend is now meaningless and the Federal Reserve has yet to give the company permission to raise it given the state of the balance sheet, profits and the economy. Permission would boost the stock. Many expect it to happen in 2012; I do not.
The bottom line: At least stay away unless you day-trade the options. Think about shorting it if you are a speculator willing to buy puts.
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