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Investment Quick Pitch – Citigroup, a Good Buy Near Its 52-Week Low

August 24, 2011 | About:

Citigroup Inc. (NYSE:C), a global financial services company, provides consumers, corporations, governments and institutions with a range of financial products and services. The company operates through two segments, Citicorp and Citi Holdings. The Citicorp segment operates as a global bank for businesses and consumers with two primary businesses, Regional Consumer Banking and Institutional Clients Group. The Citi Holdings segment operates Brokerage and Asset Management, Local Consumer Lending, and Special Asset Pool businesses. (Source: Yahoo finance)

Citigroup had hit its 52-week low of $25.40 on August 23, along with other peers such as Bank of America (NYSE:BAC), JP Morgan (NYSE:JPM) and Wells Fargo & Company (NYSE:WFC), largely due to overall weak market and negative sentiment with the banking sector.

Citigroup is one of the largest global franchises with up trending revenue of $80 billion, market cap of $82 billion, $2 trillion in assets and strong economic moat, evidenced by improving gross margin over a 10-year period.

Despite the furor over John Paulson’s shaving off his Citigroup’s stake by 19% as of a June 30 filing, his stake still constitutes the highest amongst all other gurus, specifically that of Fairholme’s Bruce Berkowitz. A cursory glance at Gurus' latest trades revealed that investors currently have the opportunity to buy the stock at a lower cost basis than the smart money.

Guru Holdings with C Portfolio Date* Change from Last Holdings Current Shares % of Shares Outstanding % of Total Assets Managed NEW!
John Paulson 6/30/2011 -18.82% 33,505,002 1.15% 4.80% History
Bruce Berkowitz 6/30/2011 2.10% 26,387,898 0.91% 8.51% History
Bill Ackman 6/30/2011 60.32% 23,520,741 0.81% 15.29% History
James Barrow 6/30/2011 885.12% 19,858,576 0.68% 1.67% History
NWQ Managers 6/30/2011 14.49% 13,783,873 0.47% 3.04% History
Lee Ainslie 6/30/2011 New Buy 10,730,265 0.37% 4.31% History
HOTCHKIS & WILEY 6/30/2011 14.09% 10,123,170 0.35% 2.46% History
David Tepper 6/30/2011 -6% 7,201,841 0.25% 7.07% History
Richard Pzena 6/30/2011 5.35% 6,744,724 0.23% 2.55% History
Steve Mandel 6/30/2011 -29.66% 6,573,057 0.23% 2.06% History
Source: GuruFocus


Citigroup pitch:

1) Cheap valuation (banks typically trade at 12x earnings, and Citigroup currently trades at 8.33x, the lowest range compared to 10-year average low/high of 13.2x and 22.4x). Ergo, when Citi closes its valuation gap, it should be trading near $40 (EPS $3.28 TTM), with upside of 43% (Citi currently trades at $27.51 at the time of this writing).

2) Currently trades at below its book value per share $58.9 (recent TTM), with small chance of raising dilutive capital.

3) Improving ROE trend at 5.94% (TTM) despite noted reduction in financial leverage, as the deleveraging process continues.

4) Current zero interest rate policy (Fed had frozen them till mid-2013) allows Citi to earn attractive spreads. Citi’s fee-related services and strong cross selling culture provide another avenue of returns.

5) High margin of safety at 76% providing downside risk protection

6) Credit losses may have peaked, but sentiment on houses and jobs are crucial and important catalysts. Citi has large exposure to mortgages and credit cards, both of which rely on the willingness and ability of consumers to service their debt.

7) Pure play on international/emerging markets growth. But of course economic headwinds will create share price overhang, despite reduction in common stock outstanding to the tune of 3 billion due to reverse stock split.

8) Hard to perform bottom up analysis since bank stocks are more influenced by macroeconomic factors. Therefore the caveat in investing in Citigroup hinges largely on the macroeconomic denouement in the next few weeks, particularly Fed's upcoming Jackson Hole meet.

Note: Figures obtained from Morningstar and GuruFocus

Disclosure: No positions but may initiate it within next 24 hours.

Note: This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.

About the author:

Graduated with BA Economics from National University of Singapore. Passed Level 1 of the CFA examination and CAIA Level I Candidate. Long-biased US equities, with strong focus on small to mid-cap stocks (NYSE, NASDAQ, AMEX, OTC & ADR) utilizing fundamental and technical analysis.

Agnostic investor, trader, writer and perpetual student of the market.

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