A Mild "Thumbs Up" for Citi

10/26/2010 3:03 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

In the long term, I’m not especially interested in owning Citigroup (NYSE: C).

I think the bank’s consumer banking business, once its 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 (NYSE: 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. Citigroup 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 chief executive officer Vikram Pandit has told Wall Street he expects to be able to begin returning cash to shareholders—either in the form of a dividend or stock buybacks—in 2012. (That would mean the Treasury has sold its remaining stake in the bank.)

But one of the most intriguing possibilities (one I mentioned in this recent post) is that someone, most probably a big US bank, decides to buy Citigroup for what remains, despite the damage, one of the top bank franchises in emerging markets.

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 US 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 US economy weakens. (And I’d assume that the current mortgage foreclosure mess won’t be kind to 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 (JUBAX), 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 here.

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