Friday, March 21, 2014

Last week we purchased 127 shares of Citigroup (C) at $47.57.  I will write this blog to give an overview of the company and my investment thesis.  

     After the 2008 crisis, Citi lost all it's shareholders trust, leading to a $450+ decline in share price.  They received over $40 Billion TARP bailout dollars from the government which took a 37% stake in the company.  The gov't put restrictions on the company, limiting the CEO salary to $1 and disallowing dividends.  Within two years Citi repaid the feds in full, who in turn sold off their remaining shares. The company followed with a 1-10 reverse stock split, meaning an investor who owned 10 shares of $4 apiece, now owned one share worth $40. 

After the crisis, Citi split it's segments into Citicorp, it's central operations, and Citiholdings which are all the bad assets from the crisis and are looking to sell off,  Citi sold 25% of Citiholdings in 2013, and now sits at only 6% of assets. They are waiting for an economically proper time to sell the rest. 

Much of my investment thesis centered around it's cheap valuation.  They are currently the lowest valued of the largest US banks.  It's forward P/E of 8.6x is a 45% discount to the S&P's. Compared to a banking index, it's P/B of .74 is a 50% discount to the average.  It's P/E and PEG are also at a 24% and 15% discount respectively.  It's at a 25% discount to P/TB, which leads that the stock should be trading at it's tangible book value of $65/share.  They are actually the only major bank trading below their book value.  (BOA 1.6 BV, Wellsfargo 2.2 BV etc)

This discount may be because the market carries a negative sentiment regarding the company since the crisis, leaving it tarnished after a government bailout.  But as the financial crisis fades and the economy moves towards new heights, the stock should elevate in price.   Also, the current CEO Michael Corbat is focused on turning the conglomerate back into a "boring bank" which I translate into a safer bank.  He is focused on cost-cutting and retracting from poorly performing markets with better asset allocation, has been very successful.  

The results of the Fed's stress test came out yesterday, and deemed well for the banking industry overall.  Citi's position is slightly worse.  They declined in Tier 1 common ratio from 8.3% (which led he banks last year) to 7% this year.  This is still above the fed's requirement of 5%, and will most likely bode for an increase in dividends.  

 The week we bought the stock it declined a few dollars, which was the perfect dip in price I was looking for.  After one week, the stock is trading at $50.36 ( 1pm friday) representing a 5.88% increase since we bought in.  My price target is $58. I will keep you guys posted. 

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