Earlier this week, shares of Citigroup Inc (NYSE:C) got a boost from the increasing likelihood that the federal tax bill would pass. Now, though, C stock price is teetering on breakout status and could be signaling a buy.
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In fact, it’s not just Citigroup stock that is moving up, it’s the whole sector. Bank of America Corp (NYSE:BAC), Morgan Stanley (NYSE:MS), Goldman Sachs Group Inc (NYSE:GS) and others are pressing higher. Financials as a whole remain attractive. One of my favorites remains BAC stock, which just hit new highs earlier this week.
But C stock has plenty of upside too. Let’s talk about why.
Compelling Fundamentals for C Stock
Citigroup stock trades with a price-to-earnings (P/E) ratio of 14.5 and with a forward P/E ratio of 12.7. Those are pretty low metrics, particularly considering earnings are forecast to grow 12.7% in 2017 and another 11.3% in 2018. Analysts expect revenue to grow 2.5% and 3.6% in 2017 and 2018, respectively. Citigroup’s sales growth is decent and its double-digit earnings growth is very respectable.
Additionally, Citigroup has beat earnings estimates for 11 straight quarters. Who’s to say the 11.3% estimate for 2018 is enough, particularly in an environment where the U.S. economy is seemingly getting stronger by the week? More banking, spending, mortgaging and jobs growth should lead to a growing bottom line for Citigroup.
Further, Citigroup’s price-to-book ratio make the case that C stock is undervalued.
The book value of a company is its total assets minus intangible assets and liabilities, and the P/B ratio is a great way to relate this to the corporation’s current stock price. In essence, a P/B ratio of 1 means the share price is equal to the company’s book value. A sub-1 ratio means it’s worth less than book value and a ratio greater than 1 means shares are worth more than book value.
With a P/B value of 0.96, C stock has a lower valuation than BAC, GS, MS, Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM). In fact, the closest peer to Citi stock is BAC, with a P/B value of 1.17. Using some back-of-the-envelope calculations, C stock would have to trade at around $92 in order to have the same P/B ratio as BAC. That’s roughly 22% above current levels!
Trading C Stock
That’s not necessarily saying that Citigroup stock has 22% upside from where it sits now. But when looking at the whole picture, it’s easy to argue that at least some upside exists. How much? Well, let’s look at the chart.
There have already been three solid breakouts since summer. Is breakout No. 4 on the horizon? Last Thursday, it looked like that was the case. But then C stock couldn’t hold its intraday move and went lower. On Friday, it couldn’t break through either.
Maybe this will be the week or C stock will gear up for another move to eventually do so.
But here’s the good news: trendline support has been strong all year. Should C stock fail to break out, it could pull back to this level. So, in essence, there are two trades for investors. Either wait for a close over $76 and buy the breakout or buy on a pullback toward the trendline.
Will it go to $92? It might over time, but I wouldn’t bank on that as a short-term target. (Sometime in 2018 is realistic, though, presuming the market holds up and the economy continues to gain momentum.)
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The Bottom Line on Citigroup Stock
We have a company that’s operating in an industry facing lower regulation, with a backdrop that is perfectly geared toward its success. With an improving economy, consumers and businesses alike will be helping (knowingly or not) their banking partners.
Throw in the potential for tax reform and the banks become even more attractive.
C stock, with its low valuation and compelling earnings growth, is an attractive target. For those who don’t like single-stock exposure, but want more alpha than a fund, consider owning several, high-quality bank stocks. This could include BAC and JPM in addition to Citigroup.
Add in Citi’s 1.7% dividend yield and C stock becomes even more attractive.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
