Wednesday, December 23, 2009
The shares of Citigroup (NYSE: C) having been beaten down to around $3.30 because of its massive recent equity offering, it occurs to me that now might be an interesting time to buy them speculatively. I am not proposing betting the nest egg, mind you, but just that small portion of capital set aside for speculative investments that could pay off handsomely. I think of it as the entertainment portion of my financial plan.
Anyway, any reactions?
Man, TH, you blow my mind sometimes.
Citibank: Too big to fail, too sick to succeed. This is a stock for traders, not investors.
The full extent of their off-balance sheet liabilities are still not known. Nor is their exposure in Eastern Europe and the Middle East. Citi could easily wind up back under Government protection.
Their management's decision to dilute common shareholders to raise funds to exit TARP in order to pay themselves bonuses should tell you everything you need to know about how where management's loyalties lie, and that's NOT with the common shareholders. Have they ever heard the phrase "fiduciary duty"?? Shareholder derivative lawsuits are coming, and justifiably so.
The average crack dealer has stronger business ethics than these guys. Why in God's name would you ever put your capital at risk by investing it with them?
Anon, I agree with some of that, disagree with others. The pay constraints are a real problem for the TARP banks -- the better people are going to flee the companies with such constraints to go to the ones that do not. Worse are the restrictions on hiring non-Americans in the United States, which have created no end of problems for these international organizations.
Now, that said, I do wonder whether C is a good stock for the long haul. I suspect not. The question is whether it can go up, say, 50% in the next year. That would not be bad, and it seems pretty possible. That's the question. Are the shares already discounting most of the bad news, or not?
Ultimately, C is a balance sheet play. Employee pay issues aren't as big a factor.
C is trading at roughly 50% of its book value per share. Book value per share is a meaningful metric for a bank. In normal times C should trade at around 2x book value. C also has tons of NOLs, which were preserved with special IRS dispensation. Quality of management is a factor in the difference between 1.5x book and 2.5x book -- but that's a higher class issue.
So how much unrealized losses does C have buried in its balance sheet. In the long run, if less than $75 billion, it's a great investment. If more than $200 billion, you're toast.
Prince Walid made a fortune with this kind of a bet on C in the early 1990s. But he could have crapped out. Texas Pacific made a big bet on WaMu before the big downturn when it led a $7.0B recap. It went to zero.
Near term, with rates low and with its NOLs -- C should generate strong increases in book value per share -- so long as it can delay recognizing losses.
I offer no opinion on C's current market value or the risks shareholders now face.
That said, C has had near death experiences before and managed to recover smartly.
Citi closed at $1.50 on a split-adjusted basis ($18 at the time) on October 9, 1990.
C reached $58 in 2000.
I had a small aliquot of Citi preferred that, in a former life, I thought was a safe place to stash some funds and have it earn a good income (at least better than sticking it in a MM).
Thereafter, when my preferreds were graciously exchanged for common stock (WTF??!) I then had a little over 21000 shares of either Zombie stock or Mad Money...depending on your level of optimism.
Being decisive on money matters (heh...), I split it up into three groups, sold 7000 at 5, will sell the socond 7000 at 5 and hold on the the remaining 7000 and see where it takes me...but dump at three.
Hope that helps....heh, heh.
What part of Citibank's business is worth investing in? Citi strikes me as such a basket case that option-like pricing on their shares indicates confusion. Investors don't know what is valuable there and are hoping there is something. After all, the share's are completely worthless.
Options can move dramatically in price because of news, so any decent piece of news seen as affecting Citi could easily move it 50%. I'd bet, if you look back, you can see lots of volatility in the price relative to other basket case banks over the last six months or so. On that basis you'll have an opportunity to make some money, but I completely agree with the earlier comment that this is a trading opportunity and not an investment.
If you buy, watch it carefully and trade it. Don't think of it as an investment until the picture is clearer. For whatever it's worth to get investment advice from complete strangers, that would be mine.
Note to JPMCT
One of the strange things I could never understand is that bank preferreds are typically priced at $25 per share and sold to the retail market, when the optimal buyer is actually another corporation that can use the "dividend received deduction." The DRD is at least 70%, which can really goose returns.
Bank debt is typically priced at $1,000 and sold institutional. A corporate investor can get a much higher yield with the benefit of the "DRD" for moving down one level in priority.
The bank capital rules favor "non-cumulative preferred" which I'm amazed anyone would buy, but I've seen sold. "Non-cumulative" means you can pass on paying the dividend and the holder has no recourse. Most of what banks sell is cumulative -- unpaid dividends accrue -- as there are only so many dumb investors out there.
There are three things every investor needs to do to get this right:
1. Spend at least 20 hours reading C's financial statements and estimating what it is really worth by determining the true value of its net assets in all of its business lines. With many businesses it takes less time than that, but C is ridiculously dense and, I think, the value of many parts of its business are not capable of being estimated. The current price, while low, tells you nothing about what it is worth;
2. Seek out the opinion of those who disagree with you. (That, I think, was the point of your request).
3. Only buy it when the price in the market is significantly less than your hard-earned estimate of its value...significantly less;
To Mad As Hell:
My reasons for dabbling in preferreds are not so complex. In a healthy economy, the returns were simply better. I wouldn't be interested in a preferred that paid less than 7%. I still have some...like Royal Bank of Scotland, that continue to pay great returns while the value of the actual stock is tanking. As long as they pay better than equivalent cash in a money market fund, I hold.
A moot point actually. L:ike many guys that make their living in health care....I'll divest in the market and put the money in a harbour while I plan my escape before the insanity kicks in in 2014.
Can you imagine what a bummer it would be to be a medical student right now?