News Analysis date published New: 
Monday, March 5, 2012 - 13:00
New Date created: 
Monday, March 5, 2012 - 13:09
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Monday, March 5, 2012 - 13:00

Why I'm Holding on to my Stake in Citigroup

Monday, March 5, 2012 - 1:00pm

The last weekend of February was a tough one for me. I came across a news item that led me to think I made a big mistake.

About a month ago, I recommended Citigroup (NYSE: C) as a pick in my $100,000 Real-Money Portfolio.

One of the key pillars of my investment thesis: "Citigroup is tackling its cost structure more seriously (and)… has the makings of a surge in earnings that few are talking about right now." So when a columnist at suggested that Citigroup was making poor progress on that front, I realized it may be time to unload the stock from my portfolio.

I have one clear rule when it comes to stock-picking: when the investment thesis has changed, don't talk yourself into sticking around. Coming up with other reasons to justify owning a stock is a losing game, because you'll probably need to keep suffering newer excuses why a stock's potential rally has been delayed.

In fact, I started to write an article explaining the painful decision to sell this stock so soon after I bought it. But a voice in my head told me to verify the truth behind that report. And as I dug deeper, I found that Citigroup's cost-cutting efforts remained a priority. For example, the following Monday, Feb. 27, Credit Suisse added Citigroup to the firm's U.S. focus list, noting that at the 2012 Credit Suisse Financial Services Forum, "management struck a serious tone on their aim to actively manage the expense base going forward. They target $2.5-3.0 billion of cost reductions in 2012 compared to 2011."

I took a look at the most recent analysis at other Wall Street firms, and it appears that Citigroup's management is repeatedly stressing the cost-cutting mantra. Notably, earnings forecasts for Citigroup are exactly the same as when I first recommended the stock a month ago. It seems that only Bloomberg questions Citigroup's ability to cut costs.

But I'm not a fan of this bank stock simply because of projected cost cuts. Instead, I still see two other catalysts. First, as shares are no longer subject to the doom and gloom scenario that Greece represented, they should trade back to book value of $48 a share. That's 40% upside right there.

Second, I think Citigroup will emerge as a solid growth story in 2013 and 2014. The U.S. consumer is getting slowly healthier, which bodes well for Citigroup's domestic consumer banking division. And the bank's heavy investments in Asia and Latin America should start to bear fruit in coming years as well. Once Citigroup is firing on all cylinders, this stock could hit $60. It will take a great deal of investor patience before that happens in a few years, as Citigroup and the economy are likely to deliver more periodic scares. But I'm convinced that this bank is healthier now than many believe, and will be even healthier in a few years than many project.

In the near-term, an intriguing potential catalyst looms. In the middle of March, Citigroup is expected to announce the results of a deep review of the bank's capital structure. Management wants to identify how much money it needs to remain in compliance with regulatory standards, which have been sharply boosted since the crises of 2008. Any money that is in excess of required Tier 1 Capital will start to be returned to shareholders.

Analysts say Citigroup will announce a modest dividend, perhaps yielding around 1% to 1.5%, but management is also expected to talk about a much more robust dividend for 2013 and beyond. Management may also look to buy back shares, though that prospect looks less enticing as shares move back up from the lows seen in 2011. Still, with shares remaining at a sharp discount to book value, a $3 billion to $4 billion share buyback is a real possibility.

Any time you see a stock selling below book value, a share buyback is clearly the better move. But Citigroup needs to build a deeper following among institutional investors, which often run funds that hold yield plays, so the bank's bias will likely be dividends over buybacks.

Risks to Consider: The market has had a nice rally and may be due for a pullback. If so, then shares of Citigroup are likely to stay stuck in the current range until any incipient market slump has abated.

Action to Take --> Citigroup reminded me of an important lesson. Never shoot first and ask questions later. Instead, take every possible cautionary new item seriously, but confirm the facts for yourself.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC owns shares of C in one or more of its “real money” portfolios.

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