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Thursday, August 27, 2009

Citibank: Opportunity in Cow Chip Before It Returns to Blue Chip Status

Former blue chip stock Citibank (C charts) is now a "cow chip" according to Hank Smith, VP, board member, portfolio manager and Chief Investment Officer as Haverford Trust Co.

Click chart courtesy of stockcharts.com for full size image

Hank Smith was a guest on today's "The Call" show on CNBC with Amanda Drury (Bio & pictures), Melissa Francis (bio and pictures) and Larry Kudlow. When asked about Citibank, he said:
"We would put Citi in the category of former blue chip, now cow chip. That doesn't ...

[laughter from Amanda Drury, Larry Kudlow and Melissa Francis in background]

That doesn't mean you can't make money. Look. It was a cow chip in the early 90's as well. It certainly made investors a lot of money for those willing to buy near the bottom."
I agree with Hank Smith. I have made a lot of money over the years buying "cow chips" that are out of favor with investors before major changes are made to the companies to regain "blue chip" status.

Click chart courtesy of stockcharts.com for full size image

Citi is one of the stocks I've done very well with over the long term in "Kirk Lindstrom's Investment Letter" explore portfolio.

Explore Portfolio Summary
Citigroup
Charts
-------------------
-------------------
Total $ Bought ($29,018)
Total $ Sold $26,703
Dividends $7,801
Difference $5,485
Shares held 1,400
Exposure/Share on house $
$ / Share $4.880
Held Value $6,832
Investment Gain $12,317

My most recent "explore portfolio" trade in Citi was to add 350 shares at $2.95. I currently have no "auto sell" levels set for myself or subscribers but I am considering taking profits between $5 and $6, perhaps selling half I bought after a double.

Below are some excerpts from my August 2009 newsletter (composed 7/22/09 and emailed 7/23/09 ) about Citi. You can also read the full text with graphs and table here in slow to load pdf.
Citibank at $2.80
Annual Dividend = $0.04
Dividend Rate = 1.43%
  • Citi reported Q2 profits of $4.28, or 49¢ per share, compared with a year-earlier loss of $2.5B, or 55¢ a share. Revenue surged 71% to $29.97B, driven by profits from selling Smith Barney and “write-ups” from the rising value of its toxic assets. Citicorp retail, commercial and investment banking business revenue and profits fell 11% to $14.96B and $3.06B, respectively. Citi segregated its worst assets into “Citi Holdings” which includes the consumer-finance brands that do not generate deposits such as CitiFinancial, Primerica and CitiMortgage, along with "toxic" loans and securities. Citi’s Tier 1 capital ratio, a key measure of reserve levels, rose to about 12.7% in Q2, compared to 8.7% in Q2-08 and 11.9% in Q1-09. Tangible common equity, another gauge of financial strength based on the amount of stock it has, grew by $9.1B in Q2. This is all good news as it puts distance from fears of bankruptcy.

  • Valuation & Chart: Write-ups of toxic assets could continue as the economy exits the recession. Without the sale of Smith Barney, Citi lost money. Earnings estimates and valuation calculations are still near worthless but I am showing them below so we have a record of analyst estimates near the bottom. Just last month analysts had Citi losing $3.00 to making 40¢ next year. This month they have Citi “only” losing 55¢ to making the same 40¢. It seems insane they cut the loss on the low end by a factor of 7.5 but didn’t increase the upper end by a single penny. The big fear of bankruptcy is past so the bottom should be in. Citi cut the quarterly dividend to 1¢ a share where it will stay until they repay the TARP money. At $0.04 a year, the dividend rate is 1.43% at $2.80.

  • It seems everyone hates Citigroup now so that is the time to have a position which is why I have not sold even though it seems to have stalled its recovery while other stocks we know have great business models are going higher.

For my newsletter, I added C as an original pick in September 1998 at $18.75 split adjusted because it was cheap and it diversified my original portfolio that was 60% in technology stocks. In 2000, I sold enough Citi between $53 and $59 to get all my original investment out and then some. I have used the remaining shares since then to trade its long-term volatility while collecting a dividend. What I used to like about Citigroup was it made real money and paid a good dividend. I was happy to collect the dividend when it traded in a narrow band between $40 and $56 between 2003 and 2007. I feel dumb for trusting Citi management to be smart enough to avoid the troubles from the real estate bubble. My consolation is I sold enough Citi when it was high to be on house money.

KEY: I am put SOME “profit taking dollars” back into Citigroup with the hope it can repeat is rise from the ashes much as it did after the housing market collapse in the early 1990s
.

My latest update for Citibank is in the just released September issue of "Kirk Lindstrom's Investment Letter." Subscribe Now.

Since 12/31/98 "Kirk's Newsletter Explore Portfolio" is UP 131% (over a double!) vs. the S&P500 DOWN 1.7% vs. NASDAQ down 7.9% (All through 9/7/09)

As of September 7, 2009, "Kirk's Newsletter Explore Portfolio" is up 18.8% YTD vs. DJIA up 7.6% YTD.

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Kirk Lindstrom's Investment Letter Performance

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