Citigroup: Buy The Dip, It Will Not Last
Summary
- I have been bullish on Citigroup for quite some time.
- In fact, my most recent prognostication of a significant dividend increase has come to fruition.
- Even so, no investment thesis is without risks.
- In the following piece, we delve into the potential headwinds for Citigroup going forward.
Citigroup (NYSE: NYSE:C) has more than doubled since I first recommended the stock at $31.27 in 2012.
Source: Finviz.com
Nonetheless, there were many ups and downs along the way.
Source: Finviz.com
With the bank clearing the latest qualitative CCAR with flying colors, I see much more upside for the stock in the coming years. Nonetheless, some short-term headwinds have recently materialized that can hamper the stock's ascension in the short term.
Yield curve not cooperating
The spread between long- and short-term bonds is near its flattest in the last five years.
Source: YCharts.com
The 10-2 yield curve has begun to flatten again recently. I expected the spread to increase as the Fed continues to raise rates. Nevertheless, the recent news that inflation is under control could cause the Fed to hold off on plans to keep raising rates. If the Fed comes out and states it is not going to raise rates again in 2017, this could be the catalyst for a pullback in the stock.
Citigroup benefits greatly from a rising rate environment. This allows the bank to earn even greater profits on the difference between the cost of funding and lending rates otherwise referred to as the net interest margin (NIM). Taking into consideration the size of Citigroup's balance sheet, a small shift in interest rates can have a big impact on the bank's bottom line. The fact the Fed stated inflation is under control in its latest meeting is not good news for Citigroup.
Auto loan showing signs of cracking
Cracks in auto credit have begun to surface. Some see this as the canary in the coal mine regarding the health of the U.S. economy. Longer, seven-year loan terms and a crackdown on subprime lending due to an increase in default rates are signs of a top. What’s more, the sales of the top three car companies seem to be rolling over as we speak.
Geopolitical risk
Current macroeconomic and geopolitical issues remain a concern. President Trump seems ready to go to war. I guess his bark is not worse than his bite as many, including myself, have stated. I hope nothing of the sort happens. The issues with North Korea and Syria seem massive to me, yet the market has barely flinched. This brings to mind the theory the bigger they are, the harder they fall. If war does break out, you can bet Citigroup’s stock will be taken down with the rest of the market.
Housing must stay on track
The U.S. housing market needs to stay on track. The market is still booming, yet inventory levels remain inadequate. This is causing home prices to rise substantially. Many first-time home buyers are currently being left with no options. Something has got to give at this point. What’s more, new home builders have essentially left the first-time buyer market behind. The fact of the matter is there is little to no margin on a new home priced below $200,000 these days. This could cause the industry to eventually roll over.
The Bottom Line
I am bullish on Citigroup in the long run. Blue sky lies ahead for shareholders in the form of dividend growth and capital appreciation for those willing to hold the stock for the long term. The bank's improving fundamentals should allow Citigroup to increase the dividend significantly over the next few years. Nevertheless, no stock shoots straight up like a rocket. There will be peaks and valleys along the way. The lack of inflation may cause the Fed to reverse its hawkish stance and slow the pace of interest rate increases. This will be bad news for the banks in the short run.
Nevertheless, I believe the risk/reward equation still favors long trades. Even so, I would wait for earnings to be announced prior to opening a new position at this point. I would buy the dip if one materializes.
Furthermore, anyone looking to start a new position should layer in over time to reduce risk. The market could see a significant selloff if some type of exogenous geopolitical event occurs. The market is still in ear shot of its all-time highs. Those are my thoughts on the matter. I look forward to reading yours! Please use this information as a starting point for your own due diligence.
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This article was written by
I am a self-made man and started out my career in the US Army's 10th Mountain Division as a Mountain Infantryman. I am a member of the DAV and a Disabled Veteran. IÂ have managed my own portfolio for the past 30 years. This includes successfully navigating the 2000 and 2008 bubbles, so I completely understand the full cycle the market can take. People who know me in investing circles call me the "Bubble Surfer" for my ability to preserve capital during times of duress. My professional background has provided me with an intimate knowledge of corporate financial statements and how companies actually make money. This expertise and wisdom is the value I wish to share with you. Here is a profile of me featured in the Globe and Mail detailing my career.
DISCLAIMER: David Alton Clark is not a Registered Investment Advisor or Financial Planner. The Information in his articles and his comments on SeekingAlpha.com or elsewhere to be used as a starting point for your own due diligence. Do your own research and always consult a registered investment Advisor.
Analyst’s Disclosure: I am/we are long C. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (21)
Here's some "trash talk" for you: ten years ago, almost exactly, then Citigroup CEO Chuck Prince famously said, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing." Within months of this statement, Citigroup was faced with failure and had to get a taxpayer funded bailout. The share price fell from the $50s to the low single digits. Fast forward to today, we have financial leverage ratios and asset prices reaching all time highs, interest rates still near zero, and the world's central banks are starting a tightening cycle. We will indeed see what the outcome will be.
The stock should go up as the buybacks continue which will enhance its value. But let us not forget, Citi will have to take a write-down if the tax law changes, as expected. This write-down could be as much as much as $ 6-7 billion?
