Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Citigroup Inc. And BofI Holding Inc. Are Both Very Cheap Stocks, But In Very Different Ways

Despite the markets making new highs on a daily basis lately, the banking sector is still relatively cheap. Some banks, like Citigroup (NYSE: C  ) are cheap simply because they trade for a steep discount to their intrinsic and long-term value. Others, like BofI Holding (NASDAQ: BOFI  ) are cheap because of their tremendous growth potential.

Let's take a closer look at these two companies and decide which one is the best fit for your portfolio.

Citigroup is in better shape than you may think
By far the cheapest of the "big four" U.S. banks, Citigroup trades for just 74% of its book value, and 87% of its tangible book value, which represents all of the bank's tangible (and therefore sellable) assets.

In other words, if Citigroup were to decide to go out of business tomorrow and sell off all of the assets on its balance sheet, the amount of money they receive should be substantially more than shares are worth. That is cheap.

Most of Citigroup's business is actually doing quite well. The bank is better capitalized than some of its more highly valued peers, with a Basel III Tier 1 Common Ratio, a good indicator of strength, of 10.6%. In contrast, Bank of America and JPMorgan Chase's ratios are 10% and 9.5%, respectively. Citigroup's capitalization is also improving more rapidly than the others, with 8% year-over-year growth compared with 5.5% for JPMorgan and just 3.4% for B of A.

However, Citigroup is still cheap for a couple of reasons. First, it has a lot of international exposure, particularly in emerging markets, and it is very tough to quantify the potential effects of a global downturn on Citi's global business.

Also, and the easier reason to keep track of, is that even though Citigroup has done an excellent job of winding down its Citi Holdings "legacy" assets so far, there is still a long way to go. The unwanted assets have been reduced from $290 billion in 2011 to just $114 billion currently, but considering how Citigroup's market cap is about $147 billion, the bad assets could do some damage to the stock price if a large percentage were to default or lose significant value.

Despite this, I feel the risk is more than priced in, and Citigroup's valuation will continue to climb as more and more of the bad assets are expunged from the company's balance sheet.

BofI could be at the forefront of something revolutionary
BofI Holding is not cheap in the same sense as Citigroup is.

In fact, when you look at a chart comparing the two companies' valuations, it looks downright expensive. Citigroup trades for less than the value of its tangible assets, while BofI trades for more than 3.5 times its tangible book value.

BOFI Price to Tangible Book Value Chart

The reason BofI is cheap is because it is one of the most innovative companies in the banking sector, if not the entire market, and its potential remains largely untapped.

In a nutshell, BofI's (which stands for Bank of Internet) business model is to keep their costs as low as possible by doing its business almost exclusively through the Internet. In fact, despite having over $3.8 billion in assets, the company operates from a single office in California.

As a result, BofI operated at a TTM net profit margin of almost 34%, as compared with 25% for the overall banking industry. The company's revenue is growing at twice the industry average, and the consensus of analysts covering the company calls for BofI to grow its earnings at an average annual rate of 29% for the next three years.

In addition to keeping its expenses down, BofI can also pass some of its savings along to customers, which gives it a unique competitive advantage. If the bank doesn't have to pay for physical locations, and has a fraction of the employees of similarly sized banks, it can afford to offer mortgage and other loan products at lower interest rates than the competition and can pay more than peers on deposit accounts.

So, which to buy?
There are very valid, but different reasons to buy each of these banks and both make perfect sense for a long-term growth portfolio.

Citigroup's business is already there and doesn't have too much room to grow (relatively), but you can buy it for less than it's worth. So, you can buy a company worth $54.51 per share for just over $48, and any future growth is simply a bonus.

BofI, despite all of its recent growth, is still a very small company in banking terms. With $3.8 billion in assets, it pales in comparison to the big banks like Citigroup, which has nearly $2 trillion in assets. So, the growth potential here is huge.

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

Read/Post Comments (0) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2986857, ~/Articles/ArticleHandler.aspx, 9/4/2015 4:08:18 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

Today's Market

updated 6 hours ago Sponsored by:
DOW 16,374.76 23.38 0.14%
S&P 500 1,951.13 2.27 0.12%
NASD 4,733.50 -16.48 -0.35%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/3/2015 4:00 PM
BOFI $108.84 Up +1.07 +0.99%
BofI Holding CAPS Rating: *****
C $51.79 Up +0.04 +0.08%
Citigroup Inc CAPS Rating: ***