Name That Trade $C: Citi Healed?

by Enis June 2, 2014 3:01 pm • Commentary

Citigroup has been one of the worst-performing bank stocks over the past year, down more than 10% in that period.  The stock has been range bound since last summer, though it has held the $45 support level throughout the stock’s weakness this spring:

C daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
C daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The 50 day moving average has finally flattened out in Citi, and the stock is trading above the 50 day ma on today’s bounce.  The 200 day moving average is now declining, however, around $49.50.

Fundamentally, Citigroup’s Q1 earnings report was actually one of the best among the investment banking names, beating on both the top line and bottom line.  Its fixed income division held up much better in a quiet quarter, and the company held expenses in check.  Despite that encouraging report, Citigroup’s stock has not recovered the $50 level since its gap lower in March.  That gap was caused by the Fed’s rejection of Citigroup’s capital plan, so C still only plays a 0.01 dividend with no share buyback program.  

Yet, Citigroup’s valuation is certainly pricing in a fair bit of bad news, with the stock trading more than 15% below tangible book value (around $56), and a 9.5x P/E with analysts expecting 10-15% earnings growth over the next couple of years.  Given management’s shift towards a more consistent earnings profile (emphasizing retail and commercial banking), the old ways of large, volatile swings in earnings power are less likely to resurface.  Even if the earnings growth forecasts are too optimistic, Citi’s valuation likely offers plenty of room for error, particularly compared to most other large-cap financials stocks.

At this juncture, we are still not constructive on the financials sector as a whole, but Citi does seem to be a potential standout for future outperformance.  However, the technical situation is likely to be range bound in the near-term, and no catalyst for the shares exists until the next earnings report in mid-July.

If C does sell off to near the $45-$46 support area, we will likely pull the trigger on a bullish structure targeting the $50 level, possibly something like a 45-50-55 call butterfly in August or a simple call spread in July for the earnings event.  For now, we wanted to lay out our broad thoughts on one of the few cheap stocks in what we view as a broadly expensive market.