Citi: A Sell at $3.00?

I really thought we would finally see a less negative view on Citigroup (C) from Meredith Whitney a couple weeks back when the stock hit three bucks. Whitney, you may recall, is the Oppenheimer & Co banking analyst who downgraded Citigroup to "underperform" last year when the shares traded for around $40 each. Last month, Citigroup hit a fresh intra-day low of $3.05, capping a stunning 13 month 92% drop in the shares of what once was one of the most valuable U.S. companies.

What a perfect time that was to remove a "sell" rating. At $3.05, Citigroup stock likely had two possible long term outcomes; go bust or go a lot higher. Whitney could have closed the book on what would have been one of the best analyst calls of all time. It would be easy to justify upgrading Citi to "neutral" at $3 per share. After all, after a 92% drop, the risk-reward trade off is far less compelling unless you really think the company won't survive.

Whitney has never indicated she thinks Citigroup will go under, so I have to think recommending investors sell the stock at $3 makes little sense, unless she wants to remain the most bearish analyst on Wall Street and an upgrade of a large bank stock wouldn't fit that mold.

In the past two weeks, Citigroup stock has surged by more than 150% from the ridiculously low $3 quote to $7.70 per share as I write this. If that $3 print turns out to be the low (I am not predicting that necessarily, as I have no idea where bank stocks could trade in the short term), Whitney might have to remove her "underperform" rating at much higher prices, which tarnishes the call because she would have that rating on the stock as it doubled, tripled, or even quadrupled in value.

If the stock goes back down in the coming weeks or months, I think Whitney would be well-served to put a neutral rating on the stock, claim victory, and cement her Citigroup call as perhaps the best sell side recommendation of all time.

It would not be an easy decision given the banking sector still has not overcome its problems, but moving on would signal to investors and her clients that she has not resorted to simply being the most bearish banking analyst on Wall Street. Just because that is what put her on the map, it does not mean staying bearish for too long could not take her off of it just as quickly.

Full Disclosure: No position in Citigroup at the time of writing, but positions may change at any time.

Comments

[CM in MA:]

What cracks me up is that anyone pays any attention to what any analyst has to say. I'll give Meredith Whitney credit in that she called Citi to some extent--the stock had already fallen from highs in the mid-50s when she went to "underperform." She certainly did better than most analysts following financial firms. But, was it luck? This question goes to the point of the article about changing the rating. What information is she using to form her opinion. The analysts rely, to no small degree, on information provided by the companies being analyzed. It's pretty clear that the folks at Citi, and at other financial companies, don't know what's happening on their own books. How should Meredith Whitney, or any other analyst, be expected to figure it out? The real laughs start when analysts at Citi, GS, JPM, et al, put a recommendation on each other. Again, these same analysts would be hard put to explain their own company's books.

2008 Dec 03 02:58 PM

[HOJOKAP:]

WHEN THE ANALYSTS ALL JUMP ON THE BANDWAGON TO CUT TARGET PRICE AFTER IT HAS ALREADY DROPPED 50%, THEY ARE NOT ADDING ANY VALUE TO AN INVESTOR. THE SAME ON THE UPSIDE. DO THE OPPOSITE AT THE TROUGH & THE PEAK FROM THEM IS THE WAY TO MAKE MONEY IN THE MARKETS.

2008 Dec 03 03:49 PM

[JP in TO:]

I feel that Whitney has merit in her concerns about the the banks she studies. She's calling for the same fate for Wells Fargo. I hope I don't have to come back in a couple of months to do a "She told you so".

2008 Dec 03 06:29 PM

[mik123:]

Meredith Whitney is the only analyst that has a sell on Citigroup yet it has moved up 150%. When she went negative on the stock, it went down 65% at the same time the market went down 50%. If the SEC changes mark to market rules, it will probably go right back to the price when she went negative on it in very short time. That would make her call worthless since she never got you back into the stock. The stock is moving up now so her call wil be worthless in a couple of months.

2008 Dec 03 07:16 PM

[roger maxims:]

Stock price = discounted cash value of forward EPS

As at Dec 2008, Citi's stock price should fall between:

0.98 [2% inflation] x ZERO [2009 loss]
to
1.03 [3% deflation] x ZERO [2009 profit]

which gives a price range of absolute zero to positive zero.

Please don't tell me 3 years or 5 years later Citi will become profitable again. All banks profit on ever-increasing leverage, that's what mortgages and credit cards are all about.

Imagine what would happen if Citi reduces your mortgage by half and your credit card limit by a third now.

To stop the train is hard, to drag it in reverse when there's still coal in the boiler is suicide.

2008 Dec 04 06:26 AM

[Pent up demand:]

Research shows again and again that the analysts are a case of "even a stopped clock is right twice a day". They are a good telltale for where the herd is going if you are a contrarian. That's about it.

I agree with roger maxims. People have this wild notion that
1. stock is beat down
2. no way gov't. will not let them go out of business
3. profit

As roger says, look at when earnings per share go positive. Maybe in 3 to 5 years. In between time, you will get diluted, and/or high-yielding preferred will be issued to make sure that the profits go anywhere but to the rubes in steerage (common stock). If you want to buy a lottery ticket, go pick up some long dated calls on C.

2008 Dec 04 09:29 AM

[nelson mandela:]

interesting

2008 Dec 04 11:29 AM

[88008:]

Citi is perhaps the worst run of the big banks and the only reason they are still in business is government handouts. For Citi to stay in existence they are going to require a lot more in the way of handouts. You may welll see the stock rise in the short term but I doubt that enough funds can be pumped into its coffers from the government for it to survive. The entire banking system cannot stand the strain of the potential losses but Citi is one of the top three in being over exposed.

Going long on C is definitely a lottery pick.

2008 Dec 04 12:00 PM