The Tycoon Report

Why Citibank, With an 8% Yield, is a Bargain

Thursday, December 13, 2007 | Chris Rowe

Citigroup - The largest bank in the U.S. has lost 45% of its value this year so far.  The company said it plans on continuing to pay the dividend, which currently yields 6.2%.

(When I think of Citigroup, it reminds me of a conversation I had with Teeka Tiwari at the 2002 stock market bottom.  We were picking each others' brains, looking for the best stock ideas for our clients, and he said, "Chris, you've gotta own JP Morgan here.  It has the same 7% yield as the corporate notes you've been buying, but you have all the upside that the stock gives you as well.")

By now you've probably heard that Vikram S. Pandit was named CEO and Win Bischoff chairman after Charles O. Prince III resigned from both positions last month after announcing over $18 billion in write-downs.  The announcement of Pandit's taking the position of chief executive sent the stock down another 7% yesterday to $30.85.  So why doesn't the Street like the new management?  Because Pandit has never run a public company in his life, and Bischoff has little experience in operating a consumer bank.  These are the people responsible for overseeing a bank with an extremely diversified model, and obviously, the Street is dreading the next piece of negative news about the mortgage crisis and how it will be addressed in 2008.

Three questions:

1. What is your time horizon?
2. What does Citigroup look like technically?
3. Do you like to buy when the stock is up and looking great, down and looking terrible, or down, but showing improvement after several signs that confirm a bottom?  (I like the latter.)

Let's consider the technical picture.

First of all, what do you think of the market as a whole?  Well, the breadth indicators that I respect so much show an oversold market in a bullish position.  The external picture shows warning signs that I also have to respect.  So I have both bullish and bearish positions while I am slightly slanted toward the bullish side.

The bank sector is way oversold where the breadth indicators are down at levels not seen since late 2002.  So the general market, as well as the bank sector, are both oversold in terms of breadth, and starting to pick up upside momentum. 

Citigroup is what we call a "story stock".  It's in the paper or on television every other day.  The story is obviously the mortgage crisis and the new management.  Since the most emotional investment for most people is the in their home (where they live, eat, sleep, raise their children), the mortgage crisis becomes one of the most emotional stock market stories possible.  Everyone is affected.

Anyway, let's look at this technically, using the MACD and RSI.

Below is a 20-year daily chart of Citigroup.  When the RSI is below 30, it's a signal that the stock is oversold.  When it reverses back above 30, it's an RSI buy signal.  (Just as a reminder, we never rely on one or two signals, but we look at a large number of signals form a large number of indicators.)

The RSI was in the teens!  There are two other times on the chart below where we saw the stock this oversold.  Once in 2001, and before that in 1990.  These were two of the best times to buy Citigroup.  Let's zoom in (click on the image to enlarge it) ...


Below is a 10-year daily chart.  I highlighted in green where the RSI is below 30 (oversold).  In 2001, you could have acted on this signal and made about 60% in just a few months.  Obviously, the market wasn't finished punishing the stock yet, but if you held it from the purchase point in 2001, you still bought it close to the 2002 bottom.

I also drew two green lines indicating past support levels.  If the stock breaks the first one, it can get down to about $26 before finding new support.  If the stock makes it that low, you're buying the stock with an 8% yield.  Don't forget that people love to buy 8% paper with the expectation of getting their principle back in a decade.  Do you think that this mortgage crisis will be over sometime in the next decade?  If so, you might consider keeping a close eye on Citigroup because if it drops much lower, it will tempt me to break my rules and buy it.  (My rules keep me from buying "falling daggers", but  they also keep me from buying at the bottom.)

Let's zoom in some more...


Below is a three-year daily chart.  There are two things that you might want to focus on.  One is the MACD crossover (the blue line crosses above the reddish brown one), and the other is the RSI buy signal (reversal from the TEENS to above 30).

Now again, my PERSONAL style won't allow me to step in and buy until I see a bit more confirmation of a bottom.  But if you're a long-term stockholder (rather than an intermediate-term options trader) you might look for different criteria than I do. 

One more zoom in please...


Now here's something that we love to see.  Not only do we have buy signals in the RSI and MACD, but we see a positive divergence in BOTH.  This is a big deal (a very bullish sign).  Personally, I like to see the support levels tested before I step in and buy.  But there are a few ways to play this, depending on your personal investing style...


1. Nibble.  You might buy some here (while we have a 6.2% yield) and wait.  If it pulls back (and breaks through support), you might buy the rest if it bounces off of the $26.00 area.  (Again, this is a very long-term hold, and you can't cry if it drops to $20.00.  The buyers at the 2001 lows who didn't cry when it went from $30 to $52 to $30 were handsomely rewarded.  (Besides, imagine if you hold it and sell covered calls on it!!  You can make 12-15%/year without the stock even advancing.)

2. Sell naked puts.  This isn't as risky as it may sound, because you are limited on your downside (your short put trades to $30 if the stock moves to zero, which won't happen).  It's not like selling naked calls.  You take in the premium, and it deteriorates just from time passing!!  And if you're willing to buy the stock at $30.00, then you should be willing to sell the naked puts with a $30 strike price.  This isn't a lesson on options, so if you understand it, consider it.

3. Buy it here, and don't look back.  Accept the 6.2% yield.  Don't get upset if it drops to the mid-20s, and you miss the yield going up to 8%.  You are in low-risk territory, especially if you are a long-term trader.  Again, I'm usually not.  And that's why I wrote this in The Tycoon Report free of guilt towards The Trend Rider.  This wouldn't make it to the Trend Rider Model Portfolio which is 90% accurate over the last eight months.  (Had to throw that in there, didn't ya, Chris?)  But I thought everyone should consider the yield that you'll receive WITH the long-term upside.

Enjoy.


“Profit from the Trend”

Chris Rowe
Chief Investment Officer
The Trend Rider