Can Citigroup Overcome Its Checkered History?

Money managers normally ignore past decades to concentrate on what’s ahead for a stock market next 12 months. Is it actionable, likely to make you money? Being early is half the game. Look out when you’re late. The penalty for a foolish entry point easily runs at 10%, overnight.

Volatility is the operator’s cross to bear. Not just for tech houses or a trading sardine like GameStop, but for high flyers like Tesla and Shopify. Properties with little or no earnings - like airlines, do surge or drop 50% over a couple of months. Cyclicals like Freeport-McMoRan, Halliburton, U.S. Steel and Alcoa jitterbug 15% intraday, when NASDAQ 100 is the game of choice. This is a repeatable pattern.

Such price gapping prompted me to revisit Citigroup some months ago. I like banks as the way to celebrate the coming reflation. My assumption is COVID-19 by mid-2021 has run its course.

Anyone who held Citigroup past 5 years experienced share price amplitude of 100% up and 50% down. Citi’s double top rests around $80, but it reverted to $40 in hard times. Expand your time horizon in Citigroup back to the 2008 - ‘09 financial meltdown and you’ll see near total wipeout not just for Citigroup but for Bank of America as well. Jamie Dimon steered JPMorgan Chase through this disaster, not as wrapped up in iffy mortgage paper that was pretty much uncollateralized.

Citi traded in low single digits early 2009. Then, it performed a reverse split. Adjusted high for Citi on its old stock, today would count into the mid-500 level. If Citi compounded earnings at a 15% rate, it would take 15 years to regain such old high respectability.

As banking is a global business, several recessions would intervene, so my numbers seem too conjectural. Remember, Merrill Lynch had to be merged out as a near basket case, Lehman Brothers succumbed in tatters. Money managers with long memories are more likely survivors when all hell breaks loose.

JPMorgan Chase dipped below $20 in the 2008 - ’09 crisis, but now trades near high ground at $156. I own it but JPM is no bargain for a bank, trading at 15 times current earnings power. When I look at the net interest margin on loans, what drives bank stock prices, it’s hard not to believe margins can’t head higher.

My leading indicator is net interest margins, driven by loan demand and the progressive yield on 10-year Treasuries. Past couple of months, this paper forged ahead from 0.5% to 1.59%. When I pulled my chart on 10-year Treasuries, going back 30 years, I drew a trendline through the 2.5% yield. In 2010 this yield peaked at 4%. Then, a year ago, it dropped to 0.5%. Rising net interest margins with healthy loan demand could raise 12-month earnings for banks by 10% or more.

Lemme deal with some bedrock metrics. After its rally, JPMorgan Chase sells close to 2 times book value. Citigroup which sold at a deep discount to book past 12 months, has closed this gap to a 20% discount. After their rallies, JPM sells at 15 times estimated earnings while Citi tracks closer to 10 times my estimate.

Why such wide disparity? Well, Citi periodically gets in trouble while JPM, like a battleship, plows through the waves. I regard JPM as a fully priced piece of paper, nowhere near an optimal earnings projection. For example, in wealth management,

JPM’s master portfolio for years has underperformed its benchmark which is pretty close to a 60/40 ratio of equities to fixed income paper. I searched in vain to find any of the big wealth managers overweighted in NASDAQ 100, the preferred sector to be in past 12 months. Citi sells at its tangible book value around $74. It carries a hefty percentage, 40% of revenues, tied to individual loans which could remain flattish. But, credit charge-offs are looking better, frequently from a release of old reserves. Citi needs to invest more capital in building its infrastructure. A mistaken capital payout counting into hundreds of millions was more than an embarrassment. It’s “Looney Tunes” stupidity.

If you believe in the world’s reflation, believe in bank stocks and related financials. My biggest position is in Goldman Sachs, followed by Citigroup and Bank of America. The less problem ridden JPMorgan Chase seems pricey but still is the soundest operator. Put 20% of your money in financials. Then keep your fingers crossed. Martin Sosnoff and/or his managed accounts own Citigroup, Freeport-McMoRan, Halliburton, U.S. Steel, Alcoa, Bank of America, JPMorgan Chase and Goldman Sachs.

Disclosure: I am/we are long C.

Additional disclosure: Martin Sosnoff and/or his managed accounts own Freeport-McMoRan, Halliburton, US Steel, Alcoa, Citigroup, Goldman Sachs, Bank of America, JP Morgan

This blog was originally published on Seeking Alpha