Since the beginning of the year, Citigroup (C) has risen by 16%, giving some investors hope that the years of underperformance may soon be ending. In this article, I will present the case that from a quantitative analysis standpoint, Citigroup may have reached a bottom and price may continue to rise in the future. For the purposes of this article, quantitative analysis is simply the process of codifying and testing investment logic to see if logical relationships are actually accompanied by price change.
A History of Returns
In order to fundamentally analyze Citigroup, I have relied extensively on return on assets. Return on assets is the net income of a firm divided by average total assets across an operating cycle. The utility of return on assets is that it shows the analyst how effective an organization is at using its asset base to generate revenue. In the case of Citigroup, around 67% of its assets are composed of "Long Term Investments." Long term investments are essentially loans, which banks use to generate profit. By studying return on assets, we can better understand how Citigroup generates profits from its core business - lending. The chart below shows 10 years of return on assets.
The chart above shows three primary economic periods in history for Citigroup. In the points below, each of these periods is studied in depth. The table beneath the points summarizes the points discussed.
- The first key economic period is from the second quarter of 2005 to the second quarter of 2007. This period in Citigroup's history was marked by economic growth and expansion in that return on assets increased by nearly half. The market rewards companies which are able to generate returns and Citigroup is no exception in that during this time, the price rose around 22%.
- The next period worthy of analysis is the second quarter of 2007 until the first quarter of 2009. This period of Citigroup's history was devastating as Citigroup experienced massive losses resulting from the financial crisis of 2008. During this period of time, Citigroup was driven into unprofitable operations and if not for a bailout by the government in 2008, the organization would more than likely have ceased to be an operating entity. This period of financial decline can be seen in return on assets, which declined steadily throughout these quarters. The market does not favor organizations in decline and Citigroup encountered losses of around 92% to its shares over these years.
- The final noteworthy economic period is from the second quarter of 2009 to the fourth quarter of 2011. During this time period, Citigroup's return on assets buoyed significantly and it once again resumed profitable operations. In my opinion, this time period marked the bottoming of Citigroup's economic suffering. Over these years, the market rewarded Citigroup by driving up the share price around 4%.
As can be seen in the table above, periods of economic growth tend to be accompanied by increases in stock price. Conversely, periods of decline tend to be accompanied by degradation in share performance. This relationship is logical and intuitive and has historically explained price behavior cogently. It is on the basis of this economic relationship that I believe that investing in Citigroup may be a prudent idea. History has shown that as returns increase, price tends to increase as well. For the past two quarters, Citigroup has experienced a slight decrease in returns followed by a recent surge in return on assets. It is my belief that this resumption in returns represents an excellent opportunity to profit.
Seasonality Favors Citigroup
In order to best time investments, I believe that individuals can utilize seasonality. Individual stocks and the overall market tend to trade in seasonal patterns which the nimble investor can exploit. For example, the stock market tends to rise in around 60% of all Januaries and 76% of Decembers. By knowing and understanding these historical patterns, investors can best position themselves to profit from the cyclical nature of markets. Citigroup exhibits seasonality as well in that it tends to rise in 53% of all May periods as can be seen in the table below.
For the past 36 years, Citigroup has increased in the majority of all years during May. This is an interesting and noteworthy relationship, but investors should not rely purely on statistics to make investment decisions. A logical fundamental driver of this relationship is that certain classifications of large institutional investors tend to cycle in and out of different sectors and industries during particular times of the year. It is on the basis of this cyclical investing that individuals can put this figure into perspective and utilize it in making a more informed investment decision. Based upon quantitative fundamental and statistical analysis, I believe that Citigroup represents an excellent investment opportunity.