Citigroup Capital Plan Rejected: How to Proceed with the Stock
(C, $47.72, up $0.27)
Wall Street was stunned yesterday when the Federal Reserve denied Citigroup Inc.’s (C) capital plan, during the second leg of reporting of the Fed’s recent stress test results. Citi had planned to repurchase $6.4 billion of stock, and to increase its dividend by five cent per share. Citi will continue with its current aim to repurchase a previously-authorized $1.2 billion of stock through first quarter 2015.
The Fed blamed the rejection on the complexity of Citi’s multinational operations, and cited a recent $400 million fraud within Citi’s Mexican operations.
Citigroup immediately announced a redeployment of capital towards repurchasing $2 billion of trust preferred securities, due April 28, 2014.
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Morgan Stanley commented yesterday, “A capital diamond currently in the rough, we believe today will be a good buying opportunity for Citi investors.”
Earnings per share (EPS) growth projections have slowed at Citigroup, since my January 6 report, to 10%, 19%, and 9% in 2014 through 2016. The PE is very fair at 9.9; and the dividend yield is tiny at 0.08%.
On March 20 I wrote, “The slower EPS numbers are not high enough to keep a buy rating at Goodfellow LLC. As such, I’m removing Citigroup from my buy list. The stock is not overvalued, and could easily rebound to recent highs of $55.”
The stock is likely to continue trading between $47-$51 in the short-term.
The numbers are still attractive enough for it to rebound towards $55. The problem is that investors who want bank stocks have smooth sailing as they choose other financial institutions with good earnings and good dividends. In comparison, there’s no logical reason to choose Citi’s stock, which has been hamstrung by the Fed, and therefore contains more risk, and fewer reasons to rise.
If I owned the stock, I’d trade out at $50.40 and reinvest my capital into a stock with strong earnings growth and a bullish chart. Subscribe now to read my weekly feature, Monday’s “Buy List”, for excellent current investment ideas.
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I would not short this stock — the trading support level is strong, and does not appear to be in jeopardy.
There will, of course, be traders who want to “buy low” to catch the price rebound, but I would recommend confining short-term trades to stocks with bullish fundamentals. “Trading” doesn’t have to mean throwing all caution to the wind.
Goodfellow LLC subscribers are kept apprised of trading and investing opportunities in stocks which meet our fundamental and technical investment criteria, thereby limiting risk as much as is reasonably possible.
Investors who want to “buy low” for a longer term hold are, again, encouraged to invest in stocks with strong fundamentals & charts, to maximize their chances of making money sooner rather than later.
Goodfellow LLC Rating: Sell (at $50.40), Volatile, Public. (03/28/14)
All eight 2013 & 2012 Goodfellow LLC stock portfolios
dramatically outperformed both the S&P 500 and the Dow!
View our outstanding 2013 and 2012 stock portfolio results.
Send questions and comments to research@GoodfellowLLC.com.
Happy investing!
Crista Huff
President
Goodfellow LLC
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