The banking industry, for at least the past 15 years, has been one of the most profitable and stable industries. Why? Well, we know how banking works - you give a company some money, they lend it out to people for anywhere between 5% - 20% and pay you roughly 0.5% on your common checking account. Then, every time you want access to your money, you have to pay a fine, and every month for the privilege of lending your money to them, they charge you a monthly fee. It’s a thing of beauty isn’t it? To any business man or investor, it is.
But what happens when the banks have to start taking losses as their 5% - 20% loans start defaulting? You pretty much get the mess we’re in now.
There’s no question that financial stocks have taken an absolute beating in the past quarters, and it’s difficult to find an entry point with more news of recession, big bank write-downs, bond insurers going bankrupt, etc; all financial stocks seem to be a case of catching a falling knife.
But a value investor shouldn’t be too interested in what the market is doing; he/she should be concerned in buying quality assets at reasonable prices, and Citigroup’s (NYSE:C) price is very reasonable.
As of yesterday's close, Citigroup’s price is $23.11/share. With total assets totaling over $113B, this puts Citigroup’s book value at $21.80 / share. In the past 10 years, Citigroup’s share price has never come this close to it’s book value.
And if you are worried about the stock dropping even further (as it very well may), you should be glad you’ll have more opportunities to buy a great valuation. Not to mention when you are paid a cool 5.5% in dividends while you wait out the storm.
At the end of the day, banking is a great sector to be in most of the time, and in the long run, it always makes money. If you are taking a long-term approach to your investing decisions, Citigroup is a great company to pick up now and hold onto for the next 5, 10, 15 or more years.
Disclosure: Author has a long position in C