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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


March 13th 2014 Citigroup
NYSE Symbol: C
Industry: Banking
Price as of 3/12: $47.98

After a spectacular 2013, the major averages have struggled to get their footing in 2014. The Dow Jones is still in the red for the year while the S&P 500 has made only modest gains. The stand outs so far are the Nasdaq and Russell 2000 both up over 2.7% for the year. Many of the names that worked last year continue to work this year. Biotechs like Gilead Science and others remain at or near their all-time highs. Transportation stocks continue to outperform like the railroads and the airliners. With all the weather disruptions this winter you might expect to find the airlines in a bit of a correction yet the three major carriers Delta, UAL, and American Airlines Group are at or near all-time highs. American Airline Group (formerly US Airways) is up 50% year to date. That's a good indication that there might be more upside to the stocks when the weather finally clears. Trying to find another sector for 2014, many investors are playing a theme that started in 2013, rising interest rates. While rising interests rates are bad for bonds and Bill Gross at PIMCO, a rising interest rate environment benefits insurance stocks like Metlife, Hartford, & AIG. Less wintery storms would also benefit the sector. However, the banks are typically the first sector investors flock to when the economy improves and rates start to creep higher. This week we'll highlight one of the largest International banks in the world, Citigroup. Citigroup has had more than its fair share of bad press over the last 6 years, most of it deservingly so, but the fact that most investors can't name the current CEO, Michael Corbat is a good sign the bank is putting many of its troubles behind it. Trading for one of the lowest multiples in its sector and plenty of private equity and billionaires like Leon Cooperman touting the stock, makes Citigroup a good risk reward for 2014 and beyond.

Back in January, Citigroup reported a fourth-quarter profit that more than doubled 2012 earnings, but still fell short of analysts' forecasts. Lower fourth quarter U.S. mortgage refinancing activity in North America hurt Citigroup's numbers, but the company still earned $2.7 billion, or $0.85 per share, on revenues of $17.8 billion. That compared to net income of $1.2 billion, or $0.38 per diluted share, on revenues of $17.9 billion for the fourth quarter of 2012. Citigroup has been pushing to rebuild profitability by cutting costs, reducing staff by 11,000 since late 2012. CEO, Michael Corbat indicated that although Citigroup didn't finish the year as strongly as they would have liked, they did make substantial progress toward their key priorities in 2013 which should set up well for 2014. The analyst at Raymond James called the weak quarter a buying opportunity, since Citi's turnaround is still in early stages and management is likely to raise the stock's dividend in March and buy back more shares in the future.

Citigroup's valuation provides good risk reward in 2014. Currently the stock trades for 9 times earnings, 8 times 2015 earnings, and 0.75 times book value of $65 a share. The stock would have to rally 35% to get to its book value which still would give it a PE of 11 times earnings. Citigroup is the only major bank to trade for less than its tangle book value of $55 a share. The stock would have to rally 15% to trade in line with its peers at tangle book levels. Citigroup provides only a modest dividend unlike most bank stocks, so it's more for capital appreciation. But compared to its peers, Citigroup is growing faster, trades at a cheaper valuation and looks like a good stock to take advantage of the rising interest rate environment and improving global growth fundamentals.