You may often have to hold your nose when making contrarian plays in the market - after all, if an unloved stock has nothing but positives, would it really be overlooked? Probably not.
Such is the case with Citigroup, (C), the much-beleaguered member of U.S. taxpayers' favorite group - the "too big to fail" U.S. banks, a group we previously discussed in last week's article about Bank of America, (BAC). Even though Citigroup only pays $.04 a year in dividends, there's actually a long-term way to earn over 20% on Citi, listed at the bottom of this article.
First, the good news: Let's look at the low valuations for Citigroup, which is currently at the bottom end of its 5-year P/E range.
Citi's tangible book value/share is the highest of this group, while its Price/Tangible Book Value/Share is the lowest. Its Price/Sales is lower than its counterparts, JP Morgan, (JPM), Wells Fargo, (WFC), and BAC, and its Price/Free Cash Flow/Share is also quite low:
Citigroup also looks undervalued on a PEG basis for 2012 and 2013, with PEG values far below the 1.00 threshold. Citi's growth is expected to steadily increase in 2012 and 2013:
Bad News Dept.: So, why isn't the market jumping onto the Citigroup bandwagon?
1. Citi's provision for loan losses is the highest of the group:
2. Analysts are currently estimating loan losses to rise about 4% in 2012:
3. Citigroup has a big presence in Europe, (EAME), where its 1st quarter earnings slid 25%:
However, consider this - there may be light at the end of this long tunnel: Citi had a total allowance for loan losses of $29 billion as of 3/31/12, and it will write off about 45% of this amount in 2012, but it's still projected to grow earnings over 10% this year.
If Citi writes off a similar amount in 2013, it may only have 10% of its current loan loss overhang left to write off in 2014. Given that Citi has also increased its capitalization, it may finally also get the go ahead from regulators to start paying a reasonable dividend in 2013, which should be supportive of the stock. (Citi currently only pays $.01/share quarterly.)
If all of this sounds a little bit "pie in the sky" to you, then don't buy the stock outright. Consider doing this instead:
Sell cash secured puts below Citi's share price, as far out of the money as you feel is worthwhile. But sell them with a long term, (LEAPS) expiration, i.e. January 2014. This will give Citigroup another 18-plus months to work out more of its problems, and will also achieve a break-even cost that's at least below Citi's current 52-week low.
Here are 2 cash secured puts trades that offer reasonable yields, but also give you a much lower break-even cost for Citigroup. Another bonus is that, even though you get paid now for selling these long-term puts, you won't have to pay taxes on them until 2015, if you hold them until expiration in 2014:
(You can find more info on over 30 other put trades in our Cash Secured Puts Table.)
Here's a look at some technical data for Citigroup shares. Even though Citi is flat year-to-date, Institutional investors have given its stock more support than JPM, WFC, and BAC:
I am long C.
Additional disclosure: I'm long Citigroup, via being short Citigroup put options.