Reason 1: Cheap in Absolute Terms
Citigroup stock is undervalued and cheap in absolute terms! Today we see that Citigroup roughly trades at only $4/share or the equivalent cost of a Starbucks beverage. Now what sounds like a better investment option “a couple shares of Citigroup or Starbucks for a week?” Clearly Citigroup is the better option but surprisingly a good amount of people prefer to pile wads of cash each month into Starbucks beverages which don’t offer any potential monetary benefits. Both you and I know plenty of people who spend at least $40 a month on Starbucks beverages alone. Let’s really visualize this odd reality with a simple scenario:
If I buy just 10 shares of Citigroup (trading costs not included) and it goes to zero I lose $40 or the equivalent of having to drink office coffee for one month. So in this worst-case loss scenario I am no worse off than if I just bought Starbucks for the month and saw it go into Starbucks coffers instead of my own. Now if Citigroup doesn't go to $0 then it's likely to eventually exceed $4/share as the firm slowly returns to long-term profitability.
My point here is that Citigroup’s unusually low stock price in some ways have made the investment risk analysis much more clear-cut than with other financial stocks. Citigroup offers everyone a unique opportunity. To be clear Citigroup is without question a speculative investment and the view I am taking is long term. Still, in such a time of great uncertainty if Citigroup stock doesn’t look like a bargain I don’t know what does.
Reason 2: Going Against the Grain
If we take a stroll down memory lane I think we would find that it's best to take the investment media with a grain of salt. Generally it would seem they only have great hindsight but poor foresight. As well, Warren Buffett himself said “be greedy only when others are fearful.” Well if everyone sounds pretty fearful right now I think it’s a great time to be greedy with Citigroup trading at roughly $4/share. Now is the time to go against the grain because when the financial media starts saying “now” Citigroup is a great opportunity the stock will be well above $4.
Reason 3: Wild Card
If there was ever a quality wildcard in the stock market it’s Citigroup. Trading for $4/share nobody really knows what it will do in the immediate future. It is clear though that uncertainty creates the greatest amount of opportunity. Remember, Citigroup has recovered from the brink of collapse before back in the 1990’s. The famous Prince Al-Waleed understood the wildcard value of Citigroup in the 1990’s. His timely investment took him from being a relatively unknown low-level member of the Saudi royal family to one the wealthiest people in the world.
1995 Hypothetical Illustration:
Anyone who invested near Citigroup’s bottom of $1.48 in October of 1995 and held till the end of 2006 received a return in the ballpark +3,600% with dividends not included. In this time span the investor would have gone through two bull markets and one bear market so it wasn't all roses. My point here is that the only thing anyone knows for certain about anything is that those who fail to remember the past are condemned to repeat it.
Reason 4: Surrounded in Good Company
Many intelligent people will often attribute their success to keeping and or surrounding themselves with “good company.” When looking at Citigroup as an investment it definitely sticks out that as a shareholder one of your fellow shareholders is Paulson & Company. If the hedge fund name doesn’t ring a bell it’s the hedge fund that shorted the real estate derivatives market, saw the market crash coming before everyone else, got Goldman Sachs in trouble with the SEC, and made billions upon billions in profits for its investors. Currently Paulson & Company is one of the largest shareholders of Citigroup….I hope your “spidey sense” is activating right about now.
Further, lets remember that when John Paulson head of Paulson & Company first went around looking to see how he could short the real estate derivatives market everybody on Wall Street thought he was insane. Sound familiar at all? While contemplating to buy a chunk of Citigroup today might sound ludicrous it could make you look like an investing god a couple years from now. I’m not saying investing is a game of follow the leader, or that Citigroup carries no risk as investment, but instead understand that by investing in Citigroup there is no question that you will be surrounded by “good company.”
Reason 5: Mark-to-Market Accounting
Mark-to-market accounting is the truest version of a double-edged sword when it comes to book value in the banking industry. Remember when the Citigroup was losing billions quarter over quarter and had to be bailed out? In short form summary Citigroup was being forced to write down unrecognized losses according to “current market prices” for illiquid assets they had on their books. In reality, these assets work on illiquid markets to begin with and pricing is anything but constant. It was just a blow-up waiting to happen come the next bear market. Don’t worry though now we have mark-to-market accounting poised to propel Citigroup higher. Remember, it’s a double-edged sword.
Citigroup’s book value is still grossly depressed due to mark-to-market accounting, which presents an opportunity for investors. With the economy now rebounding Citigroup is poised to explode to the upside, as it will eventually start writing “up” the very same assets it wrote "down" a few years ago. The end result will be a dramatic increase in Citigroup’s book value and the stock price with it.
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