Citigroup: Buy or Don't Buy?

CapitalWatch's Anthony Russo and Steven Lerner debate in the second installment of Stock Wars.
Steven and Anthony Oct 08,2020,23:15

Welcome to Stock Wars: Episode Two. With the banking sector hit hard by the pandemic, CapitalWatch examines Citigroup (NYSE: C). Should you buy the stock, or not? CapitalWatch’s Anthony Russo and Steven Lerner make their cases.

Anthony:

Hey Steven, I enjoyed our discussion last time on Domino’s and the booming pizza delivery industry. Now, moving towards the turbulent state of the banking industry, Citigroup has watched its stock fall 13% in the last month. However, you seem bullish on the banking firm, why’s that?

Steven:

I'm bullish on the entire banking sector for the next few months. Big banks, little banks - so many good choices. Citigroup is one of the banks that is poised to be a great stock during that time. Even you have to admit that banking is a good value sector to bet on, right?

Anthony:

Even me? Well, I don't hide my money under the mattress or anything, but I’m concerned about the banking industry. And I am especially concerned over Citigroup. But the low interest rates is the biggest issue for me—which takes a toll on profitability. What do you like about the industry now?

Steven:

The low interest rates that you bring up do not factor into Citigroup's core business strengths in investment banking, credit cards, and commercial banking. What I really like about the industry is that it is the perfect sector for value investors: Legacy companies that have seen their stock prices plummet due to the pandemic. Now is the right time to buy these bank stocks - because the prices are so damn low now. Surely you can see my point?

Anthony:

I get your point, but hotel stocks have plunged this year as well—does that mean you buy them too?

Steven:

Yes, separately I also like some hotels. They're a great value buy for long-term growth. Can’t you see that?

Anthony:

Unless you’ve got substantial business in China, hotels aren’t an ideal investment right now. Look at the trouble the pandemic has caused and will continue to cause for hotels and banks. I can see why you put long-term value on Citigroup, but my concerns are in the short term.

Steven:

Short-term, short-sighted. Please explain?

Anthony:

Citigroup’s chief financial officer has warned investors that the company’s third-quarter revenues will fall to the high single digits. It looks like it’s going to be a slow recovery.

Steven:

I disagree. I like banking stocks right now because they are more likely to recover sooner. Even with Citigroup's revenue likely falling to the high single digits, it is still better than what analysts expected, which means the stock price will go up.

Anthony:

But Citigroup has other headwinds as well. Last month, Citigroup resumed job cuts. It also just received a $400 million fine from federal banking regulators regarding its failure to improve its risk management systems. Those are big reasons on why the stock is down, along with the uncertainties that pandemic has caused.

Steven:

Headwinds aside, would you like to hear about why Citigroup is a good value play?

Anthony:

The floor is all yours, pal.

Steven:

The floor? Speaking of which, Citibank has already surpassed its floor this year and the sky is the limit. Look at the financials: A pricing-to-earnings ratio of 7.27 and a price-to-book value ratio of 0.61. The stock is incredibly undervalued. It's a great value bet for long-term investors. And a dividend yield of 3.99% is like the cherry on top of this appetizing ice cream sundae of a stock.

Anthony:

The sky is the limit as in its “longstanding deficiencies?”

Steven:

You know what I meant.

Anthony:

Before we talk about a Citigroup being potentially undervalued, the company should be more transparent with its investors. If you can’t trust a company—especially amid the worst financial crisis since the Great Depression—then nobody will buy the stock. Now isn’t the time to be buying Citigroup.

Steven:

Do you know what they say about transparency? It always remains to be seen...puns aside, I think that Citigroup is going to turn a corner to earn the trust of investors. The company just named Jane Fraser as its new CEO. She will be the first woman to lead a major bank, which is an incredible accomplishment. Fraser will aim to bring a new era of growth and trust to Citigroup.

Anthony:

That was an aphorism, not a pun.

Steven:

Okay, professor.

Anthony:

Ha. Look, I hope for your sake that Ms. Fraser is as good as you say . But still, this is Michael Corbat’s fiasco until Fraser assumes the CEO role next year. The company will be put to the test next week when it reports its third-quarter earnings, assuming there are even any earnings after that hefty fine.

Steven:

Ha, there will be plenty of earnings.

Anthony:

All kidding aside, I just don’t see a lot of short-term upside with this stock. Again, investors need to be able to trust a company to buy it. I would hold, but not buy the stock right now.

Steven:

I'm sure you'll regret not buying Citigroup now. But perhaps you'll "bank" on another stock instead...I think we can agree that I should lay off the puns (and the aphorisms) right?

Anthony:

Agreed. Now, in all fairness to you—I’ve actually been in the market for another house. Hopefully, by the time I decide on a new one, Citigroup is on the mortgage loan so I can take them to the “bank” with these low interest rates.

Disclaimer

The opinions expressed in this article do not reflect the position of CapitalWatch or its journalists. The analyst has no business relationship with any company whose stock is mentioned in this article. Information provided is for educational purposes only and does not constitute financial, legal, or investment advice.

Topics:Citigroup, buy, sell
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