Algorithm Indicates Citigroup Will Be A Buying Opportunity, But Not Yet

Apr.16.14 | About: Citigroup Inc. (C)

Summary

Citigroup delivered a better than expected earnings report.

The bank still has issues that need to be addressed.

The algorithm indicates that Citi will be an investment opportunity but the best time to become invested will be in the upcoming months.

Before earnings were released, Citigroup (NYSE:C) shares were under pressure amidst another stress test failure, legal settlements and overseas branch sales leaving the share price down 12.34% YTD before the earnings release. Over the past couple of months, analysts have cut their projections by approximately 20%, and 10% from their full year projections. However, earnings were surprisingly better than anticipated and the stock has jumped 5.76% since Monday.

Unfortunately, decent growth in 4Q13 was not enough to give positive momentum at the beginning of the year, as investors were not impressed. Although adjusted net income rose 15% (in 4Q13), the bank saw considerably lower volumes of mortgage refinancing, partially inhibiting its consumer-banking segment. Citigroup was also recently singled out amongst the nation's largest banks when the Federal Reserve denied its proposed plan to quintuple its quarterly dividend to $0.05 per share and initiate a stock buyback of $6.4 billion because the banks revenue loss projections were deficient under high-stress scenarios. In addition, Citi has about $19 billion in home equity lines of credit from the housing-bubble era that will reach the end of the draw period and start requiring principal and interest payments.

Citigroup has an interesting forecast by the I Know First self-learning algorithm. The system is bullish for this asset for the long-term horizon, however signals that there will be better buying opportunities in the next few months as shares will likely fall further before making real growth.

Performance Analysis

Citigroup surpassed expectations, delivering 4% higher adjusted net income with $4.2 billion in the first quarter of 2014. In total, net income stood at $1.23 per share, exceeding analysts' expectations of $1.14 per share. Adjusted expenses fell 1% year-over-year to $12.2 billion. There was a considerable decline in net credit losses, where cost of credit dropped from $2.5 billion to $2 billion, representing a decrease of 20 percent. Adjusted revenues slid from $20.6 billion to $20.1 billion. "Despite a quarter that was difficult for our company, we delivered strong results," stated Chief Executive Michael Corbat. By reducing cost of credit and declining expenses even with lower revenues, Citigroup's income from continuing operations before taxes rose from $5.5 billion to $6 billion, an increase of 9%.

Earnings results were varied for the banking industry and Citigroup outperformed competitor JP Morgan Chase (NYSE:JPM), which witnessed earnings drop 19% due to lower mortgage and trading revenue. Analysts expected JPM would earn $1.41 per share compared to the $1.28 per share that left investors disappointed.

Our Prediction

Last year, Citigroup was one of our stock picks from the Aggressive I Know First Risk Conscious Forecast top stock picks on April 9th 2013 for the 1-year time horizon. The term "aggressive" refers to a higher level of risk the algorithm is willing to accept for potentially higher returns. The Risk Conscious Forecast comes with a conservative forecast as well that assumes less risk. These forecasts (Risk Conscious) are suited well for when the market is more volatile and market direction is uncertain of a pullback. Citigroup did not have the largest return of the forecast but returned 8.36% in accordance with the forecast. The market prediction system (the algorithm) works by modeling and predicting the flow of money between markets. It separates the predictable part from stochastic (random) noise and then creates a model that projects the future trajectory of the given market in the multidimensional space of other markets. The system outputs the predicted trend as a number, which in turn is used by traders to identify when to enter and exit the market. Chart 1 displays the Aggressive Stock Forecast and the corresponding returns.

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The forecast is color-coded, where green indicates a bullish signal and red indicates a bearish signal. Brighter greens signify that the algorithm is very bullish as it does at the top of this forecast. Citigroup had the second strongest signal at 544.88 and a strong predictability of 0.27 displaying confidence in the forecast. The signal is the number flush right in the middle of the box and the predicted direction (not a specific number or target price) for that asset while the predictability is the historical correlation between the prediction and the actual market movements. In other words the signal represents the forecasted strength of the prediction while the predictability represents the level of confidence, however further explanations are available here.

For today's forecast, Citigroup has a bearish 3-month forecast but a bullish 1-year forecast. Chart 2 displays today's forecast for Citi over the longer-term time-horizons by the algorithm.

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This is a very interesting forecast for Citigroup. In the 3-month time horizon Citi has a bearish forecast with a signal of -30.63. The algorithm is very certain of this and the high level of confidence in this forecast can be seen in the very high predictability of 0.54. While most investors will cringe at the sight of this forecast, they will have the peace of mind in that Citi is forcasted grow over the 1-year time horizon. As such, the signal for the 1-year time horizon is 188.88 and has an even high predictability of 0.56. While the bright red signifies how bearish the shorter-term forecast is, the bright green color in the 1-year forecast reflects the bullish nature for the longer time horizon. This indicates that Citigroup can make a great long-term investment but the best time to invest will be in the next few months.

Conclusion

Citigroup did deliver a better earnings report than expected, however the bank continues to have issues that need to be resolved such as simply understanding the Federal Reserve's expectations regarding the CCAR process amongst other issues. CEO Corbat stated "We are engaged with the Fed to better understand their expectations regarding the CCAR process…We are committed to bringing our capital planning process to the highest possible standards, befitting an institution of our global reach. I will dedicate whatever resources and make whatever changes necessary to achieve this critical goal."

The algorithm indicates that there will be a better time to buy Citi shares in the near future for a long-term investment that will pay off in the years to come. The bank must show that its long-term plans will succeed in getting the bank back to basics. Though moving in the right direction, investors will need to wait before the timing is right to invest in Citi.

Business disclosure: I Know First Research is the analytic branch of I Know First, a financial startup company that specializes in quantitatively predicting the stock market. Joshua Martin, one of our interns, wrote this article. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.