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The Gist

According to a recent article penned by Bank of America Merrill Lynch (NYSE:BAC), Citigroup (NYSE:C) is one of the ten best stocks for 2013. Bank of America stated,

"Citi is an underappreciated beneficiary of the housing recovery and remains inexpensive and under owned by active managers."

Furthermore, Goldman Sachs Group Inc. (NYSE:GS) told clients to bet on Citigroup Inc. shares before its fourth-quarter earnings hit. New Chief Executive Officer Michael Corbat is cutting costs and withdrawing from some markets later this month. Goldman suggests investors buy call options before Citi announces results on January 17th. Goldman also added Citigroup to its "conviction buy list," and said shares could rise to $49 within a year.

I couldn't agree more and thank BAC and Goldman for endorsing my thesis. Citigroup is well positioned to take advantage of the uptick in the U.S. housing market. The U.S. housing market is on the mend. The fact that Citigroup is still trading at a 35% discount to book value is icing on the cake.

Citigroup has been on a roller coaster ride over the last year, yet finished 2012 on a high note up 40% for the year.

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Citigroup is a solid buy right now. It is well-positioned for 2013 growth. The stock is in good shape both fundamentally and technically and has significant catalysts for growth going forward. Nevertheless, let's not get carried away just yet. We need to perform some due diligence to make sure we haven't taken a rose colored view of the situation. Please review the following analysis of Citigroup for an in-depth examination of the stock's upside potential.

In the following sections, we will perform a review of the fundamental and technical state of Citigroup followed by an analysis of the underlying catalysts for the stock to determine what upside exists. The following charts are provided by Finviz.com, Ycharts.com and Yahoo Finance.

Fundamental Review

Fundamental Ratios Look Solid

Fundamentally, Citigroup has several positives. The company has a forward P/E of 9.12. Citigroup is trading for a 35% discount to book value. The company has a PEG ratio of 1.61 and a net profit margin of 10.95%. Director William S. Thompson bought 6,850 shares of stock recently.

Balance Sheet Much Improved

Citigroup's balance sheet is much improved over the last four years. The Fed stress tests have whipped most of the U.S. banks into shape.

Price To Book Ratio Analysis

The stock is currently trading for 65% of book value. Banks normally trade for at least their book value.

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Currently, Citigroup trades for a lower book value ratio than JPMorgan (NYSE:JPM) and Goldman Sachs which trade for closer to one. Bank of America and Morgan Stanley (NYSE:MS) trade for slightly less.

Price To Earnings Ratio Analysis

Citigroup is trading at one of the lowest forward price to earnings ratios in the industry with a forward P/E of 9.12. Only JPM has a lower forward P/E at 8.57.

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As far as earnings per share go, Citigroup is firing on all cylinders. EPS is expected to grow by 18.5% next year. Well-known analyst Dick Bove told CNBC's "Closing Bell" recently, "Bank earnings could hit a record $38 billion in the fourth quarter, while the industry is poised to have a solid 2013." Bove noted that industry earnings have risen year-over-year for the past 14 quarters, with banks collectively earning $37 billion in the third quarter.

Technical Review

The company is trading 2% above its 52-week high and has 5% upside potential based on the analysts' mean target price of $44.00 for the company. Citigroup was trading Friday for $42.43, up almost 3% for the day.

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The stock is up 40% from the 2012 low of $25. Citigroup just broke out above the major long-term resistance line.

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Technically, the stock is in a well-defined uptrend. The stock had a downturn coinciding with the election, yet has snapped back significantly in recent weeks. The golden cross was recently achieved at the beginning of October. This is a bullish indicator that has served me well. Recently, the stock appears to have gone somewhat parabolic with the resolution of the fiscal cliff.

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The Golden Cross is a significant event and should drive the stock higher as many technical traders use this as a bullish signal to buy.

2013 Growth Catalysts

U.S. Housing Recovery

According to the National Association for Business Economics (NABE) Outlook Survey, "U.S. housing market recovery will continue next year, with strong gains in residential construction and home prices." The National Association for Business Economics forecast gross domestic product would grow at an average annual rate of 2.1 percent in 2013. It predicted a 2.2 percent rate in 2012. This should more than underpin Citigroup's top and bottom lines.

Balance Sheet Strength Could Lead To Higher Return Of Equity

Citigroup has a fortress balance sheet with $450 billion in cash and cash equivalents. Trailing twelve month operating cash flow is $18 billion. The bank trades for 6.7 times free cash flow and a little over half of book value. The bank is successfully cutting costs and improving its capital position. This may allow for an increase in the dividend and initiation of a share buyback program, if the Fed approves. Citigroup will seek permission for its first share buyback since 2007 as part of the latest Federal Reserve "stress tests," according to people familiar with the company's plans.

Analyst Recommendations

The stock is currently trading 5% below the consensus mean price target of $45.89, by 30 analysts.

Downside Risks

The U.S. housing market may suffer if currently delinquent loans become foreclosures. There are a vast number of loans still on the books where people are several months in arrears. If the economy takes a downturn and some of these people get laid off, they may default completely.

The Eurozone sovereign debt debacle could finally implode causing another credit crunch large enough to disrupt the global economy.

Citigroup's stock runs out of steam as investors take profits and move on after such a recent large percentage move in the stock.

U.S. government does not solve the debt limit debate and the U.S. falls into another recession.

My Take

Citigroup is trading at a low price to earnings multiple even when taking into account lower earnings expectations and is trading at several multiples below its long-term norm. On top of that the Fed may allow the banks to return excess capital to investors in 2013. The sector is flush with liquidity and cash.

I see opportunity ahead for Citigroup with a new management team in place. With the yield curve steepening and Citigroup cleaning house, I posit the bank will become lean and mean in 2013. If you are considering buying into Citigroup, I would wait a couple days for the stock to cool off some prior to starting a position. Even so, I don't see the stock falling below $40 anytime soon. For this reason, I feel the risk/reward equation favors long trades at this point.

The Bottom Line

Citigroup is still oversold and under owned on top of strong fundamentals and catalysts for growth. The stock is a solid buy at this level if the U.S. housing market continues to improve. My target price is $60 within the next twelve months. If you choose to start a position in any stock, I suggest layering in a quarter at a time at a minimum to reduce risk.

Source: Citigroup: One Of The 10 Best Stocks For 2013

Additional disclosure: This is not an endorsement to buy or sell securities. Investing in securities carries with it very high risks. The information contained within this article is for informational purposes only and is subject to change at any time. Do your own due diligence and consult with a licensed professional before making any investment.