By Matt Doiron
At the end of March, 97 hedge funds reported positions in Citigroup Inc. (C) in their 13F filings with the SEC. This put Citigroup at #4 on Insider Monkey's ten most popular stocks among hedge funds. However, these funds have been burned since then, with Citigroup's stock falling over 25% since the end of the first quarter - which is about where it stands compared to a year ago as well, even though the S&P has risen 9% in the last 52 weeks.
At a quantitative level, Citigroup seems quite a bit like a value stock (of course, that logic is probably what led so many hedge funds to hold positions in it in the first quarter). It trades at 0.4 times the book value of its equity, and less than eight times its trailing earnings. As a financial stock, it is unsurprising that statistically it tends to be sensitive to broader market conditions, with a beta of 2. It is likely that a host of concerns about macroeconomic weakness, including in Europe, China, and the United States, have driven Citigroup and its supposedly vulnerable balance sheet to a lower valuation.
Citigroup hasn't done too badly on the earnings front in the last few quarters, beating expectations in each of the first two quarters of 2012. In its second quarter report, revenues and net income were down 10% and 12%, respectively, compared to the second quarter of 2011, but were essentially flat compared to the first quarter of 2012.
The first half of 2012 has seen revenue and earnings fall 6%-7% compared to the same period the previous year. The decline in Citigroup's business wasn't even that mixed in terms of business segments: compared to Q2 2011, revenues fell in terms of net interest revenue, commissions, and principal transactions - the three largest segments of Citigroup's operations. The only positive news was that Citigroup has seen revenue growth in Latin America and Asia in the first half of 2012, though it is unclear how much costs have risen in those geographies.
Citigroup finished Q2 with Tier 1 ratios up compared to a year ago, indicating that while business has been slower, the company is making progress on reducing its risk. The Tier 1 common ratio was 12.7% and the Tier 1 capital ratio was 14.4%. We've mentioned the low price-book ratio; Citigroup reported the book value of its equity at $62.61 and its tangible book value per share at $51.81. If the market becomes confident that Citigroup's book is fairly safe, the stock has a lot of room to rise from its current price of about $26.
Citigroup's list of investors includes a number of hedge funds, as we've mentioned, and several of them are quite reputable. Bill Ackman's Pershing Square reported owning 26.1 million shares of the company at the end of March, but they recently sold out to buy more shares of Procter & Gamble Co (PG) (see more of Bill Ackman's favorite stocks). York Capital Management nearly doubled its position over the course of the quarter to 8.8 million shares. Tiger Cub Andreas Halvorsen's fund Viking Global moved aggressively into Citigroup, as the fund more than quadrupled its position to 8.4 million shares (find other stocks in Viking Global's portfolio).
Citigroup's competitors in the megabank business include Bank of America Corp (BAC), JPMorgan Chase & Co. (JPM), and HSBC (HBC). Like Citigroup, these banks have had trouble assuring investors of the security of their portfolios (JPMorgan Chase was a bit more successful in doing so until the magnitude of its losses in the London Whale trade was revealed) and all four banks trade at trailing P/E ratios of less than 10.
HSBC and JP Morgan at least have the advantage of having market capitalization close to twice that of Bank of America Corp and Citigroup, suggesting they have a bit more protection in case of a global downturn, but the primary driver of this factor is P/B ratios: Bank of America is in Citigroup territory at 0.4, while the "larger" banks trade at 0.8 times book value for J.P. Morgan and 0.9 times book value for HSBC. Of course, the fact that the banks trade at similar P/E ratios implies that Bank of America Corp and Citigroup are in fact inferior at converting their assets into income.
We see Citigroup as a shrinking business. Yet it has a low valuation, it is possible that investors are underrating its book compared to some other banks, and a number of trustworthy fund managers are behind the stock. It might be a good long-term pick in the financial sector if an investor can weather any further negative sentiment and has a portfolio protected from a global slowdown.
Disclosure: I am long C.