Demetrius Michael submits:
I was kind of hoping Andrew would post another one. But it looks like he’s a bit busy, so I’ll decieded to find my own pick.
Yes it’s Citigroup, but I’m going contrarian on this one. I’ll keep this short to save us both time.
Fundamentals (pfft like they matter anyway)
Things we know:
1. Bad Q: Citi reported net income of $2.38 billion, or 47 cents per share, down from $1.10 in the same quarter last year. Revenue rose 6% to $22.66 billion. $3 billion in losses from leveraged loans and mortgage-backed security losses, as well as a $729 million gain on the sale of shares in Redcard SA. The company also boosted loan loss provisions by $2.24 billion. (Cramer)
2. Bad Environment: Housing Crisis, need I say more?
3. Q4s are always weaker on the housing side (for Canada atleast, but I’m sure America also applies)
4. It’s boring.
Things we don’t know:
1. CEO might leave, it doesn’t matter if he’s responsible or not. What matters is that he’ll take blame for this.
Positives:
1. It’s a bank, it won’t disappear.
2. Generating 55% of Citigroup’s 2006 revenues, Global Consumer Group comprises three sub-divisions: Cards (credit cards), Consumer Finance, and Retail Banking. (wikipedia).
Interest rate cuts help this company… Which means our very recent 50/50 cut has clearly been forgotten!
3.CMB are responsible for around 32% of Citigroup’s annual revenues, generating just under US $30 billion in 2006 financial year… "CMB" is divided into two primary businesses – Global Capital Markets and Banking and Global Transaction Services (GTS). Global Capital Markets and Banking provide investment- and commercial-banking services covering institutional brokerage, advisory services, foreign exchange, structured products, derivatives, loans, leasing, and equipment finance. Meanwhile, GTS offer cash-management, trade finance and securities services to corporations and financial institutions worldwide. (Wikipedia)
1/3 of the company is into Big Corporate! Which is also doing very well across the world (they can at-least pay their bills – most of them).
Conclusion:
I’m sure you can balance sheet me to death on the 07 projections, but in reality, we should assume billion dollar companies know exactly what they’re doing. This isn’t countrywide, why the 60 to 40 dollar drop?
What’s really interesting is that they knew about the subprime crisis back in 05, but they continued to invest in this sector. Dare I say rate manipulation? Maybe. But lets stray away from conspiracies and focus on entry and exits.
Technicals.
Charts.
Here’s a monthly across 10 years. It’s a very simple entry system.
As an investor: Scale 1/3 at 40.3(or .5), 1/3 on 36.5, and 1/3 30 flat. They’re all give or take, so you’ll just have to extent the channels to be more precise.
Options
I’ve complied a spreadsheet for you guys to play around with your own ratios and such here.
Anyways, nothing is too out of the ordinary here, except the Jan ’10 60’s are 2.40,and the 70’s are 1.4… Risk reward looks good if you sell the 70s and buy the 60s.. A buck that could turn into a 10 bagger if all things turn peachy in 2 years… It’s very rare that you get a spread this wide, so I would usually take advantage of it… If you could add selling front months to the equation and you become a cow, a cash-cow. Especially when the stock is this boring.
For a more conservative player… Buying the Jan’10 50s and selling the 60s, will cost you 2.40 on the trade, so only 4 times your money on that trade. That is, if it goes your way.
Selling the ’09, 30 strike puts for 1.50 is also a good option if you have money to spare. Owning the stock at 28.5 is good value… Especially since banks don’t die. Not quickly, and not in one year, and not when they’re global… And especially not when they have 2.2 Trillion worth of Assets (making it the world’s largest company)… Betting against this, is betting against the entire financial planet. Which I’m sure most of you have good reason to, but at 28.50, it’s like getting planet earth at discount. I can live with that.
Have fun boys.
Demetrius.
