Citigroup: Bargain Basement Price for Long Term Investors

Shares of Citigroup (C) have dipped to the mid-$2 level moving into earnings season and, as I've stated before, I think that bad news is already priced into the stock.

I don't expect that Citi will significantly surpass expectations when they release second quarter earnings, but I do like the stock as a BUY while it is trading below three dollars.

Short term traders with no stomach for patience should stand clear of C, but investors with a 2-4 year time horizon could be getting a bargain basement price right now.

That being said, if Citi does beat the street, a run up to over four dollars is possible, but the current economic climate indicates that it is not probable.

Contrary to popular belief, the banks are lending money; they're just not handing it out 'for free' as they were before the economic collapse. Granted, signs of recovery are not everywhere, but in various areas around the country used cars are flying off the lots and houses are being sold, that means the banks are lending.

The stock market is reacting to the latest news on the street, which is changing daily. One day housing numbers are good and the market responds positively while the next day unemployment rises so the market drops. This is the classic 'buy the dips' climate because you don't want to be left chasing the run if you haven't built a position before the run starts.

The big boys can afford to do that, but the little guy needs to be setting up for the recovery now.

Buying C for below three dollars should be a part of that plan.

Editor's Note 7/13: Disclosure- Author does, in fact, have a long position in the stock

Comments

[skwestorange:]

Any clue what you expect will be the value of Citi shares in say 4 years after paying off the Govt.?

Jul 12 09:00 AM

[mdpath:]

You've written a bullish article on C but it's hard to take you seriously when you say you have no position. I get tired of reading articles where the author touts a stock but then states that he has no position.

Jul 12 12:37 PM

[kjangelo:]

You have written a very positive article, but have not mentioned any of the many huge black clouds on the horizon. What about credit card defaults, mortgage defaults and the large amount of preferred which will become tradeable common on July 30, 2009 ? It is possible that many of the preferred holders will sell their common since they do not get a dividend ( and that is why they hold were holding the preferred) . Maybe all that is priced in. I would only recommend a small position until we see some resolution of the negative forces.

Jul 12 03:33 PM

[genetuck:]

Citigroup is offering me 7.3 shares of common for each of my preferred shares, and I'm not taking it. Have you noticed how many billions of common shares there will be after all the conversions?

Jul 12 03:43 PM

[Fourpenny Guy:]

But...you missed some key problems with C:

1. Dilution is about to occur from 5.5 to 22 billion shares with a reverse split in the next year. That means any shares investors buy, today, will be reduced. As Citi shrinks, profits will shrink, and C's market cap, will, too.

2. Citi is selling profitable assets, including 51% of Smith Barney, thus profits over time will be lower, not higher, as they approach typical bank earnings growth.

3. The OCC stated that C, with a market cap of 14+ billion, has 264 billion in derivatives. That means C is overleveraged almost 20 times with these so-called investments. Then, C has a problem with off balance sheet accounting, too.

4. C is still trying to get away with breaking the law-case in point-money laundering issues in Japan.

5. C's CEO has never run a business as large as Citi, sold his Hedge fund to C, the hedge fund failed, and yet, Vikram is still CEO.

6. Citi is unable to repay TARP-pretty pitiful considering they're so well run(according to C).

7, Management at the lower levels tends to be uneducated and dimwitted, hence the control issues C constantly faces. No one with an appreciable IQ would choose operations work, anyway. These people do not see the big picture and I doubt know much more than turning on their PC's. I would challenge auditors to look at every layer of C's operations to see how deep these control issues go.

8. C split into 3 companies on paper as a magic trick to fool investors into thinking they're profitable. Why not spin off the unprofitable divisions. Stop these stupid juvenile sleight of hand games that these criminals are playing with taxpayer money.

9. Citi has been shipping Jobs to India, US jobs...US taxpayer money should not support these endeavors, and should pull the TARP money back, if necessary.

So, can't you find a decent, profitable bank, and not this shell game? C needs to be broken up, and its assets sold off to better run firms.

Jul 12 03:47 PM

[Tomcat101:]

AIG just went from about $1.50 to $20 on a reverse split, and now it has already declined from $20 to about $11. I can see the same thing happening with Citi. No thanks. This would be the equivalent of your $2.50 Citi stock going to about $1.25 or so.

Jul 12 04:58 PM

[BGRT:]

Only Citi preferreds are worth buying at this point.

Jul 12 06:13 PM

[Daniel Harr...:]

I very much doubt Citi will enter into a reverse split here; there is just no good reason to. Although further dilution is definitely a big risk for any 2 - 4 year time horizon buy.


On Jul 12 04:58 PM Tomcat101 wrote:

> AIG just went from about $1.50 to $20 on a reverse split, and now
> it has already declined from $20 to about $11. I can see the same
> thing happening with Citi. No thanks. This would be the equivalent
> of your $2.50 Citi stock going to about $1.25 or so.

Jul 12 06:17 PM

[maryanne:]

mdpath has great point. I want to see an author WITH SKIN IN THE GAME. and right, I'm holding onto my preferreds (took profits on the priority ones when they rocketed to $22) Good luck trying to cash in the new post-conversion shares!

Jul 12 07:09 PM

[Moon Kil Woong:]

In my book, buying a government run bankrupt company is not an investment it's either speculation or essentially the same as getting on government assisted welfare.

Factually, there is little in the way of factual content to support the author's contention things for Citibank will be much better 4 years from now. Hopefully, 4 years from now Citibank will be broken up and sild into such small pieces it will no longer qualify to be too big to fail. As should Fannie Mae, Freddie Mac, BAC, AIG, etc.

Jul 13 01:42 AM

[punk_ash:]

Thanks for this stunning article and that rigorous analysis. It must have taken you at least 2 minutes to write it. Keep up the good work.

Jul 13 02:03 AM

[Ryu Mei Co:]

I think most readers mistook author's main point of view. Citi is, of course, a ridiculous buy even at this price at this time. But for the next 10 years or more, it could be a screaming bargain. But what do I know? Citi can go BK in the next few years.

Jul 13 03:09 AM

[Up Yours SP500:]

When the government (who has bailed out so many banks thus far) won't even touch Citi because of its toxic debt, how can you recommend this stock? It's bad when government has to bail you out, it's worse when they won't do so. Citi is a dead stock, if the Saudi Prince is still the largest shareholder, that is the ONLY reason it hasn't gone bankrupt yet....unless you are just plain naive.

Jul 13 05:04 AM

[FloridaBoy2:]

There are many other penny financial stocks to speculate with that do not have the uncertaintity and complexity of C. The derivative portfolio is a huge unknown. I'll pass.

Jul 13 05:39 AM

[VFC's Stock...:]

Thanks for the comments, all.

I Just want to clarify a couple of things. For one, it is a misprint that I have no positions in this stock. I do, in fact, have a long position in the stock and it is my fault for not making that clear on the Seeking Alpha page. However, readers of my blog (vfcsstockhouse.blogspo...) are aware of my long position in C, of which I purchased the majority of my shares for under two bucks and bought heavily at $1 when everyone was selling.

As for the future of C, of course it's a risky investment. However, the risky investments are the ones that end up making you money. My point was to look at the stock as a long term (3 years is my mark) buy, not a short term flip.

Two things with that:

- No one is buying (i hope) based solely on my suggestions. Do your own DD, as many of you have that have commented, and then make a decision. I, personally, don't like to chase stocks. I like to be in a stock before a run may occur and that means that sometimes I buy when other people are selling.

- I like C as a buy right now, but I would not make it the number one
holding in my portfolio.

The thing with C is this: The financial sector is suffering now, but it will recover. I'd be willing to bet that the market cap of Citi Group is not going to be 14 billion dollars in a few years from now. Some may guess it will be lower, but not me. I think that once the bulk of the write-offs are done the financials will run and if you're not in early, you'll miss a quick double. Like I said, I don't like chasing stocks, I like being in before a run. I'm not always right, either, C may never run again- do your own DD.

That being said, if you steared clear of stocks that had a lot of negative sentiment surrounding them, you'd never make money in the market. In order for a small time investor to make big percentage gains, you've got to find the stocks that are beaten down and you've got to buy them when everyone else is selling. That was definitely C at $1 and I think the future will prove that that was also C at $3.

That was also CSUH and TTNP at under five cents. It was also DNDN at under five bucks, AGEN at under a dollar....etc, etc, etc.
Look at those stocks now.

Sometimes you have to wait a year or two for the speculative risk-reward types of stocks to hit, but I'd rather wait two years, make anywhere from a double to a ten-bagger (or more) on my money than buy something safe and MAYBE make 15% that year, and that is a big MAYBE these days.

The point is to find the stocks with potential that other people are afraid of and buy them when they are on sale. That was my point, with Citi Group, I think the future will say that it was a good buy at below $3.

Jul 13 07:24 AM

[nobby73:]

Seriously, what was the point of this article? The important point for investors to understand right now is Citi is one of the most complex investments out there. You have uncertainty over the government, the pref shares, possible stock splits, still massive short interest. You have huge complexities in analyzing the asset and liability position, with credit cards, LBO, commercial real estate.

Telling people to look at the historical price, buy because they are too big to fail and then forget about it for a few years is bad advice.

Alternatively, I could suggest burying a bag of gold coins in the back yard and then forgetting about it, it would be amusing to see which turns out to be the better recommendation....

Jul 13 08:10 AM

[Seeking Alp...:]

Author writes: I Just want to clarify a couple of things. For one, it is a misprint that I have no positions in this stock. I do, in fact, have a long position in the stock and it is my fault for not making that clear on the Seeking Alpha page. However, readers of my blog (vfcsstockhouse.blogspo...) are aware of my long position in C, of which I purchased the majority of my shares for under two bucks and bought heavily at $1 when everyone was selling.

Jul 13 10:55 AM

[LIVE FREE O...:]

Basement yes, bargain not so much.

Jul 13 11:08 AM

[Emerald:]

I agree with the author that this is a good long term speculative play. Many problems exist but are not insurmountable when you have the government backing. Mortgages and credit card issues will wind down over the next three years and Citi will be a $6-7 stock. Citi will also have a new CEO as Pandit does not have the background in commercial lending or retail operations. Alternatively, Citi will be broken up and sold at a profit.
Note: Long "C"

Jul 13 11:36 AM

[j_remington:]

:... once the bulk of the write-offs are done the financials will run.."

That should bet eh most important consideration. WHEN will the bulk of write-offs occur? CRE write-offs are still in the early innings and residential foreclosures may have just past the middle innings.


On Jul 13 07:24 AM VFC's Stock House wrote:

> Thanks for the comments, all.
>
> I Just want to clarify a couple of things. For one, it is a misprint
> that I have no positions in this stock. I do, in fact, have a long
> position in the stock and it is my fault for not making that clear
> on the Seeking Alpha page. However, readers of my blog (vfcsstockhouse.blogspo...)
> are aware of my long position in C, of which I purchased the majority
> of my shares for under two bucks and bought heavily at $1 when everyone
> was selling.
>
> As for the future of C, of course it's a risky investment. However,
> the risky investments are the ones that end up making you money.
> My point was to look at the stock as a long term (3 years is my mark)
> buy, not a short term flip.
>
> Two things with that:
>
> - No one is buying (i hope) based solely on my suggestions. Do your
> own DD, as many of you have that have commented, and then make a
> decision. I, personally, don't like to chase stocks. I like to
> be in a stock before a run may occur and that means that sometimes
> I buy when other people are selling.
>
> - I like C as a buy right now, but I would not make it the number
> one
> holding in my portfolio.
>
> The thing with C is this: The financial sector is suffering now,
> but it will recover. I'd be willing to bet that the market cap
> of Citi Group is not going to be 14 billion dollars in a few years
> from now. Some may guess it will be lower, but not me. I think
> that once the bulk of the write-offs are done the financials will
> run and if you're not in early, you'll miss a quick double. Like
> I said, I don't like chasing stocks, I like being in before a run.
> I'm not always right, either, C may never run again- do your own
> DD.
>
> That being said, if you steared clear of stocks that had a lot of
> negative sentiment surrounding them, you'd never make money in the
> market. In order for a small time investor to make big percentage
> gains, you've got to find the stocks that are beaten down and you've
> got to buy them when everyone else is selling. That was definitely
> C at $1 and I think the future will prove that that was also C at
> $3.
>
> That was also CSUH and TTNP at under five cents. It was also DNDN
> at under five bucks, AGEN at under a dollar....etc, etc, etc.
> Look at those stocks now.
>
> Sometimes you have to wait a year or two for the speculative risk-reward
> types of stocks to hit, but I'd rather wait two years, make anywhere
> from a double to a ten-bagger (or more) on my money than buy something
> safe and MAYBE make 15% that year, and that is a big MAYBE these
> days.
>
> The point is to find the stocks with potential that other people
> are afraid of and buy them when they are on sale. That was my point,
> with Citi Group, I think the future will say that it was a good buy
> at below $3.

Jul 13 09:45 PM

[Angry Banker:]

I wonder if a year from now, when C is trading between $5 and $10, if any of the millions of Citi-haters out there will admit they were wrong. I'm long C by the way, and proud of it.

Jul 15 03:22 AM

[User 450149:]

I spoke to someone at Ameritrade today who said that if the majority of Citi preferred holders accept the common stock offer then everyone must. I also heard that in the literature which came with the offer, it says that the dividend could be taken away and the value of the preferred stock could drop to zero. So, I decided to accept the trade even though I was against it before.


On Jul 12 07:09 PM maryanne wrote:

> mdpath has great point. I want to see an author WITH SKIN IN THE
> GAME. and right, I'm holding onto my preferreds (took profits
> on the priority ones when they rocketed to $22) Good luck trying
> to cash in the new post-conversion shares!

Jul 17 06:40 PM

[think befor...:]

So don't buy it move on...by the way, time will show you how wrong you are if you're interested.


On Jul 12 03:47 PM Fourpenny Guy wrote:

> But...you missed some key problems with C:
>
> 1. Dilution is about to occur from 5.5 to 22 billion shares with
> a reverse split in the next year. That means any shares investors
> buy, today, will be reduced. As Citi shrinks, profits will shrink,
> and C's market cap, will, too.
>
> 2. Citi is selling profitable assets, including 51% of Smith Barney,
> thus profits over time will be lower, not higher, as they approach
> typical bank earnings growth.
>
> 3. The OCC stated that C, with a market cap of 14+ billion, has 264
> billion in derivatives. That means C is overleveraged almost 20
> times with these so-called investments. Then, C has a problem with
> off balance sheet accounting, too.
>
> 4. C is still trying to get away with breaking the law-case in point-money
> laundering issues in Japan.
>
> 5. C's CEO has never run a business as large as Citi, sold his Hedge
> fund to C, the hedge fund failed, and yet, Vikram is still CEO.<br/>
>
> 6. Citi is unable to repay TARP-pretty pitiful considering they're
> so well run(according to C).
>
> 7, Management at the lower levels tends to be uneducated and dimwitted,
> hence the control issues C constantly faces. No one with an appreciable
> IQ would choose operations work, anyway. These people do not see
> the big picture and I doubt know much more than turning on their
> PC's. I would challenge auditors to look at every layer of C's operations
> to see how deep these control issues go.
>
> 8. C split into 3 companies on paper as a magic trick to fool investors
> into thinking they're profitable. Why not spin off the unprofitable
> divisions. Stop these stupid juvenile sleight of hand games that
> these criminals are playing with taxpayer money.
>
> 9. Citi has been shipping Jobs to India, US jobs...US taxpayer money
> should not support these endeavors, and should pull the TARP money
> back, if necessary.
>
> So, can't you find a decent, profitable bank, and not this shell
> game? C needs to be broken up, and its assets sold off to better
> run firms.

Jul 23 12:12 PM

[think befor...:]

One of the few independent thinkers writing on this blog. Nice job!!

Jul 23 12:15 PM

[Ricard:]

I would take the author more seriously if he took the 80% dilution into account. Even if C had a market cap of $70 bn in 3 years, that would still price the stock at 3.25.

@ Angry Banker: I hope you are right.

On Jul 13 07:24 AM VFC's Stock House wrote:

The thing with C is this: The financial sector is suffering now, but it will recover. I'd be willing to bet that the market cap of Citi Group is not going to be 14 billion dollars in a few years from now. Some may guess it will be lower, but not me. I think that once the bulk of the write-offs are done the financials will run and if you're not in early, you'll miss a quick double. Like I said, I don't like chasing stocks, I like being in before a run. I'm not always right, either, C may never run again- do your own DD.

Jul 23 11:51 PM