3 Reasons To Buy Citigroup

Having underperformed the rest of the sector, Citigroup may be the last great bargain of the big banks.

Jan 31, 2014 at 7:00AM

Citigroup (NYSE:C)continues to trade at a massive discount even after the rest of the sector has rallied, unearthing one of the best deals in bank stocks right now.

Over the past few months, many banks have outperformed the market significantly. Since October, Bank of America (NYSE:BAC) is up about 21%, Morgan Stanley is up 5%, and JPMorgan (NYSE:JPM) is up 10%, even after the entire sector pulled back significantly over the past couple of weeks. 

Unlike the rest, Citigroup(NYSE:C) is down less than 1% as its peers have posted excellent gains. Aside from the fact that it has underperformed the rest of the sector, there are still several compelling reasons to get into Citigroup, as this sale won't last forever.

Reason 1: Improving business
Although Citigroup's latest earnings report disappointed the market, the company still improved its earnings by 21% over last year's. Most of the disappointment was the result of lower bond trading revenues and lower-than-expected equity trading revenues.

However, Citigroup did mention a few things in their annual report that indicate a continuing improvement in its business.  Net credit losses in the fourth quarter were 15% less than they were for the same period a year ago.  Also, the bank's deposits grew by 4% from last year, and the loan portfolio grew by 7%.  As a result, Citigroup's tangible book value per share increased by 8% since last year, indicating that the intrinsic value of its business is on the rise.

Despite the setback of not meeting analysts' expectations, CEO Michael Corbat says the bank's post-crisis turnaround is on track, and it will achieve many of its turnaround goals by 2015. The company has done an excellent job of winding down its Citi Holdings assets (which was the original focus of the turnaround strategy), which have declined by 25% in the past year, and its investment banking division is delivering excellent results.

The company has said that it plans to greatly improve and grow its U.S. retail banking business. The goals reiterated in 2012 call for double-digit loan portfolio growth (which is almost there now) and high single-digit deposit growth by the end of 2014. It look like the company has a pretty good shot at meeting both of these goals.

The fixed-income (bond) trading weakness should be temporary, if interest rates stabilize in the coming year, which should prompt many fixed-income investors to get back into the market.

Reason 2: (relatively) low legal exposure
Perhaps, the best indicator of potential legal liability at various banks is the extent to which the bank participated in the sale of mortgage-backed securities in the pre-crisis period.

Mbs Chart

Source: Dealbook. (includes acquired companies)

Citigroup has a small fraction of the liability of these banks, issuing just $91 billion in MBS during those years, and is most likely on the hook for a lot less than the other big banks. The company has already settled with Fannie Mae and Freddie Mac for just under $1 billion and $395 million, respectively. With these two settlements completed, and with relatively low exposure, there shouldn't be much more legal drama for Citi (at least related to the mortgage crisis).

Reason 3: It's cheap!
Citigroup is pretty darn cheap right now. Although the opportunity to buy the company for about 30% of its tangible book value (like you could in 2009) is likely gone forever, shares are still cheap on a historical basis.

The current price to tangible book ratio of just over 0.9 is still very low relative to both the company's historic valuation and even its post-crisis ratio. For instance, Citigroup traded for above its TBV for most of 2010, and it's fair to say that the company is much stronger now than it was then.

Now, we may not see price to TBV ratios anywhere near the pre-crisis levels anytime soon, but using Citigroup's peers and return goals as a reference, a ratio of around 1.5 sounds like a reasonable target for the next few years.

C Price to Tangible Book Value Chart

Foolish final thoughts
Even though Citigroup is cheap, there is a lot that could still go wrong that could cause trouble along the way. No one knows what interest rates, the housing market, or other aspects of the U.S. economy are going to do, and any economic setbacks could harm Citigroup's profits. Citigroup also has a great deal of international exposure, which is not as much of a risk issue to the other banks mentioned.

However, at the current valuation, the price justifies any risk associated with owning Citigroup. It may take a little while, but Citigroup's turnaround will be a success, and shareholders will be handsomely rewarded once it is complete.

The one thing that could crush Citigroup
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Fool contributor Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information