Five Reasons Citi's Worth the Long Risk 28 comments
March 02, 2009
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Citigroup (C) has to be one the hardest hit stocks I’ve seen since Nortel in early 2000. Only they don’t exactly have accounting fraud on their shoulders, just a really ugly looking portfolio.
But is it really that ugly? Here are my five reasons you should buy Citigroup Today:
- Valuation is absurd.
Despite being one of the largest banks in the World, the market has given it a price of $8.1B. They have over $150B in equity. - Mortgages will pick-up long term
Yes, Citigroup’s mortgage related-assets are a mess right now while the US is in a housing slump. The market has priced a worst-case scenario, that all house prices drop to zero (or close to it). - Invincible
Sounds cliché, but the US government will not let Citigroup fall. They’ve already put their money where their mouth is. - Bounce-Back factor
The harder they fall, the higher they usually bounce. - Citigroup has massive international exposure
If you don’t believe the US economy will recover, Citigroup is still present in over 30 countries.
Will the short-term look bad as we continue to squeeze liquidity from the banks? Yes, it’s going to be rough. Will Citigroup be upwards of $10/share in less than 5 years? All signs point to yes.
Disclosure: Author has a long position in Citigroup.
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This article has 28 comments:
You completely ignore the possibility the government will nationalize Citi wiping out all shareholder equity in the process. I think that alone makes buying Citi an extremely risky proposition.
Best,
Jon
The problem is to a large extent an accounting problem as certain assets, even performing assets, are being marked or valued at ridiculous prices as in many cases there is no trading and no applicable "market value". The problem for long term investors is the "what if " scenario of those undervalued assets being hived off into some vehicle that will prevent Citi shareholders from participating in the inevitable upside.
Then it went from $1.25 in 2003 to $41.00 in 2006 or 3,180% increase in less than 4 years while Dow Jones was able to run from 7,200 of 2002 to 14,200 of 2007 or 97% appreciation in 5 years.
What the heck is that thing? How could such thing possibly happen?
Who is to say that Treasury would not offer some modest compensation to shareholders as opposed to simply allowing its MktCap to evaporate into nothing?
Who is to say that Treasury will not turn Citigroup into a GSE? Having one "Bad Bank" in the pack is not bad. UK did it, and insured the others.
Who is to say that this is not the time to dollar cost average your C shares way down low... for exacty the reasons stated above?
I am not so LONG on Citigroup, Friends... just long on Treasury! The fools are gone. Cooler heads will now prevail.
Trust Rossi.
Thanks for the comments. To the person who pointed out the call at $23 / share, yes it hurt :( However, even Warren Buffett himself lost a ton of money too, this market is crazy!
I am certainly long the treasury and see pretty much all upside for this stock. However, I'm shocked by the terrible beating it has taken today.
It certainly appears that right now, no matter what stock you're in there is nowhere to hide, but when the market picks back up, C is going to be a place to be.
Regardless of other arguments for or against nationalization of Citi (or any bank for that matter), I am not sure that full nationalization would be any more devastating to the economy, than would bailing it out, or allowing it to fail.
With full nationalization, it is true that shareholders would lose, but the average taxpayer would not, as there would be no need for any FDIC payouts.
With a bailout however, shareholders would not lose, but the average taxpayer would, since bailout funds would have to come from somewhere. And that would result in either a higher deficit or a devalued dollar, either of which would be a substantial burden on virtually all taxpayers.
And finally, with a failure, both shareholders and taxpayers would lose. While shareholders would lose their investments, average taxpayers would have to pay as a result of the many FDIC claims which would occur.
As I've said before.... When on Seekingalpha, ignore the articles, read the comments.
P.S. These banks are already 'nationalized' (or whatever name you want to call it). If we were talking about Widget Factory, Inc. (WIDF), and the Smith family owned 10%, 30%, 60%... of the stock, we would assume the Smith's controlled the company (defacto private 'nationalization'). If the market thought Smith, Sr. had become senile, or Smith, Jr was squandering company resources, we would collectively run for the hills and await impending BKCY, REGARDLESS of the fundamentals. Nothing would be left to post about save the rants of the lazy shorts and the last few gambling longs. But because these are our beloved financial institutions the discussion is somehow different???
Well, your worst nightmare has come true - the Smiths (not to be confused with the Alwaleed bin Talal family) are in control of C. And they own a heck of a lot more than 10% of the company!!! Stop posting about valuation, global market shares, technical indicators…!!!! Just worry about Mr. Smith's sanity as that's all that matters right now.
Please, try to show a little balance next time.
More often than not, articles are written merely to promote or downgrade a particular stock, quite often held or shorted by the writer. Whereas comments are aimed at either agreeing or disagreeing with the article's content. The result is that the more comments an article receives, the more (and often better) information the reader will have available to help him or her evaluate the point of the article, thus better enabling him (or her) to perform his (her) own due diligence on any claims made.
On Mar 02 05:16 PM rich c wrote:
> As I've said before.... When on Seekingalpha, ignore the articles,
> read the comments.
perverse about conventional wisdom anyway, I came at it like this: Geithner has made Citi an example of limited gov't ownership combined with market forces, ie, private money and motivation. He's betting on Citi to make it, and if a Saudi prince or two can get a phone call and a deal, I could imagine a rallying point in the private/ extra-govt sector focused on citi, with its 30 country presence. The motivation being, we're all affected if it tanks, some more than others. The rolodexes are spinning right now.
On Mar 02 06:27 PM bob zimway wrote:
> Just for fun I bought a few C jan '10 calls at 2.50. Why? Aside from
> being
> perverse about conventional wisdom anyway, I came at it like this:
> Geithner has made Citi an example of limited gov't ownership combined
> with market forces, ie, private money and motivation. He's betting
> on Citi to make it, and if a Saudi prince or two can get a phone
> call and a deal, I could imagine a rallying point in the private/
> extra-govt sector focused on citi, with its 30 country presence.
> The motivation being, we're all affected if it tanks, some more than
> others. The rolodexes are spinning right now.
Posters are right, the government is as bad at running banks as it is investing in them. Citi is a goner. Buy the stock only if you feel like playing roulette.
1.) a valuation that is a lie
2.) a regulatory and economic fund long term change in mortgages
3.) no stocks are invincible
4.) bounce back factor was something to look at on Nov. 21st, not now
5.) International CDS exposure is exactly the thing that will make C unable to be saved by the government or anyone else.
It's a bit like russian roulette. If you chose corectly from troubled financial companys You will see few dollars on every one that you put into it. but if you are going to be wrong, you will be lucky to see few pennys from your dollar. In that game we will see big winners and big loosers i'm affraid.
I just hope they've got enough cash.
He might have presided at C had he not rubbed Weill's sister the wrong way and ended up looking for a new job. CEO at JPM is a heck of a lot better gig these days than what he might have inherited at C. What a triumphant return to the street!
1. Valuation is absurd.
Despite being one of the largest banks in the World, the market has given it a price of $8.1B. They have over $150B in equity.
...how much debt does Citi owe? If they have $150B in equity but owe for example $151B in debt then Valuation is anything but absurd
How much debt do they have on the books, and for that matter OFF the books?
2. Mortgages will pick-up long term
Yes, Citigroup’s mortgage related-assets are a mess right now while the US is in a housing slump. The market has priced a worst-case scenario, that all house prices drop to zero (or close to it).
...The Real Estate bounce back was predicted in 2006 by all of the in-the-know experts- yet real estate still went down, is still going down, and will go down in the future.
How many Foreclosures does Citi Own?
A better question is How many foreclosures does Citi own but hasn't/isn't selliing them, is letting them sit on their books, counting them as assets when they are assets that are not worth their list price on the books.(Maybe the Foreclosures are listed at their peak price on the books while the real price the foreclosures would fetch is 20%-30% Less.) Who knows what is worth what on Citi's balance sheet? Who knows how many foreclosures/CDOs/bad loans are on the books(or off the books through GAAP.) Too many unknowns to keep smart investors away from Citi.
3. Invincible
Sounds cliché, but the US government will not let Citigroup fall. They’ve already put their money where their mouth is.
...Suppose Citi is broken up into smaller banks, assets and branches sold to stronger banks,Citi is forcibly merged with another bank or banks. Nothing is invincible in this crazy market.
4.Bounce-Back factor
The harder they fall, the higher they usually bounce.
...Anybody wanna buy some pets dot com stock or enron stock or worldcom stock? They fell mighty hard but they should all bounceback any day now.
5. Citigroup has massive international exposure
If you don’t believe the US economy will recover, Citigroup is still present in over 30 countries.
...all that means is Citi has branches in 30 countries, 30 countries that might be experiencing an economic downturn the US is facing and, well, most of the planet is facing. Having a presence in 30 countries only means there is possible exposure to bad loans made in 30 countries.
I once heard that the time to get into a market is Not when it has hit bottom, but when optimism returns to the market and prices start going back up.
You don't make as much profit as you could have by buying at the bottom, but you don't lose when the percieved bottom drops to a new lower bottom, and keeps falling form there.
Me myself, I'm steering clear of all of the markets until Optimism finds its way back to Wall Street.
On Mar 02 06:27 PM bob zimway wrote:
> Just for fun I bought a few C jan '10 calls at 2.50. Why? Aside from
> being
> perverse about conventional wisdom anyway, I came at it like this:
> Geithner has made Citi an example of limited gov't ownership combined
> with market forces, ie, private money and motivation. He's betting
> on Citi to make it, and if a Saudi prince or two can get a phone
> call and a deal, I could imagine a rallying point in the private/
> extra-govt sector focused on citi, with its 30 country presence.
> The motivation being, we're all affected if it tanks, some more than
> others. The rolodexes are spinning right now.
On Mar 03 02:51 PM newfietom wrote:
> Imagine how good it must feel to be Jamie Dimon these days as C wallows.
>
>
> He might have presided at C had he not rubbed Weill's sister the
> wrong way and ended up looking for a new job. CEO at JPM is a heck
> of a lot better gig these days than what he might have inherited
> at C. What a triumphant return to the street!