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Buy Citigroup (C)
10/26/2010 10:01 am EST
I think the bank’s consumer banking business, once it’s strength, has turned into an also ran. Its capital needs forced it to put its Smith Barney brokerage business into a strange joint venture with Morgan Stanley (MS). And what was once the best global name in banking has been seriously tarnished by the financial crisis and the company’s near death experience.
Ah, but in the medium term, it’s a different story. The bank is clearly on its way to a modest recovery in earnings power as a gradually improving loan book lets the bank reduce loan loss reserves. In the third quarter, for example, which the bank reported on October 18, Citigroup announced the release in $1.96 billion from reserves against loan losses.
And CEO Vikram Pandit has told Wall Street that he expects to be able to begin returning cash to shareholders—either in the form of a dividend or stock buybacks—in 2012. (Which would mean that the Treasury has its remaining stake in the bank.)
But one of the most intriguing possibilities (one I mentioned in my post http://jubakpicks.com/2010/10/22/u-s-banks-big-problem-even-after-the-recovery-wheres-the-growth/ )is that someone, most probably a big U.S bank, decides to buy Citigroup for what remains, despite the damage, one of the top bank franchises in emerging economies. The bank still has a tremendous banking network and very high name recognition in these economies. (And, of course, there’s also the possibility that Citigroup decides to keep this network and grow it, giving this bank a share of global banking growth markets that other U.S. banks don’t own.)
Maybe the only thing Citigroup doesn’t have going for it is a good chance to produce a positive return for an investor in the near term—say, the next six months—if the U.S. economy weakens. (And I’d assume that the current mortgage foreclosure mess won’t be kind of Citigroup shares, either. But that’s why the current price makes it an attractive buy.)
As of October 26, I’m adding this stock to Jubak’s Picks with a target of $5.25 by June 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/ )
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