Taking a look at shares of Citigroup

Shares of banking giant Citigroup (C) caught my eye because of two prominent articles about it in the Wall Street Journal recently...

I don't own the stock, but I did on two occasions in the past four years – so I'm familiar with it.

And both investments were nicely profitable, so I was curious to see what the setup looks like today...

The first WSJ article from nine days ago, Inside Citigroup's Most Mysterious Business, highlights Citi's oldest and best business, which it calls "Services." Excerpt:

For decades, Citi Services has moved money around the world for companies and safeguarded big investor assets. The division, one of five lines of business, makes up half of Citi's total profit and is crucial to Chief Executive Jane Fraser's turnaround plan.

Touting these businesses might seem like a no-brainer, but they have long stood in the shadows of pretty much everything else in Citi's vast portfolio, from credit cards to bond trading.

One well-respected Wall Street analyst thinks Services is a gem that may be worth more than the entire $117 billion market cap of Citigroup:

Services is Citi's "bright shiny sun" around which its other businesses orbit, said analyst Mike Mayo. He figures it is worth about $90 billion to $120 billion...

Once one of Citi's biggest Wall Street critics, Mayo has recently turned more bullish about Citi thanks in part to Services. A few months ago, he started asking investors what they knew about Citi Services and its results. Not much, it turned out.

Many couldn't peg its annual revenue growth at 8%, or returns at more than 20%, far better than all of Citi. And many didn't know Citi Services actually increased deposits by 20% during the 2008-09 financial crisis even as Citi nearly failed.

"Even seasoned investors will get those answers wrong," Mayo said.

The second WSJ article from earlier this week takes a broader look at Citi CEO Jane Fraser's turnaround effort: The Clock Is Ticking on Jane Fraser's Citigroup Turnaround. Excerpt:

Two decades of half-measures, strategic missteps and chronic underinvestment have led Citi, once the world's largest financial-services company, to this: a network that operates in 160 countries but badly lags behind its U.S. rivals in profitability and stock performance. A firm famed for its ties to foreign central banks that can't stay out of the Federal Reserve's doghouse for weaknesses in its internal controls. A glittering roster of clients who too often turn elsewhere for their most-important needs.

Fraser is pursuing everything, all at once, in her quest to change Citi's direction. Her priority is grappling with regulators' demands to fix the troubled bank's internal systems. She's also slashing costs, simplifying the organization and seeking to jump-start growth at key businesses. And she's trying to revive a stock that's been stuck more than 80% below its high for 15 years.

As you can see from that chart, Citi's stock was crushed during the global financial crisis... and unlike the other three mega-banks – JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) – it has never recovered.

The story is the same if we look at the past five years to see how Citi's stock performed during the pandemic crash and the market rally since then:

We can see that all four mega-bank stocks – and the market as a whole, as measured by the S&P 500 Index – got clobbered when the pandemic hit.

But then the market recovered strongly. It's up nearly 90% in the past five years, with JPMorgan nearly matching it... Bank of America and Wells Fargo well behind... and Citigroup, yet again, the dismal laggard – with a double-digit negative return.

So why did I ever own it and how did I make money?

To answer the first question, I didn't buy Citi shares because I liked the company or had any particular insights about it.

Both times I owned it, I thought bank stocks were cheap, so I bought Citi as part of a basket of other large bank stocks. When the stocks moved up and I didn't think they were as cheap, I sold.

"But wait a second, Whitney," you might be thinking... "Didn't you just spend the past week telling us about your '10 for 10' strategy, which is rooted in the belief that the best way to build long-term wealth is to own a concentrated portfolio of high-quality stocks and own them for many years, even decades?"

I did – and I definitely believe that.

But there are plenty of different ways to make money in the markets... and I've developed a broad "toolkit" over the past quarter-century.

My favorite tool is buying and holding the stocks of long-term compounders – companies (and stocks) like Berkshire Hathaway (BRK-B) that grow and grow over long periods of time.

But a secondary tool I've applied profitably over the years is buying the stocks of mediocre businesses when they – or their entire sector – fall out of favor and become significantly oversold.

To be clear, I don't hold these kinds of stocks for the long run... But there's nothing wrong with making a gain of 50% to 100% in a year or two.

So with this in mind, let's take a look at the two times I owned Citi shares in recent years...

On the five-year stock chart below, the first green circle shows my first purchase at $42.56 per share on March 17, 2020, a week before the market bottomed during the COVID crash. The first red circle shows where I sold at $66.43, on July 8, 2021 – banking a 56% gain.

Then, bank stocks declined over the next 10 months – which gave me another bite at the apple...

I bought Citi again at $46.98 on May 12, 2022 (indicated by the second green circle) and exited on March 12, 2024 (the second red circle) during the recent rally at $57.71, for a 23% gain:

I'm pleased with these gains... But Citigroup was again a laggard, as I made quite a bit more money – gains of 86% and 26%, respectively – owning the other bank stocks I had purchased at the same two times as Citi shares.

So in light of positive sentiment around the company's Services business and the overall turnaround efforts, does that mean the stock looks poised for big upside ahead?

I'm not convinced...

Neither the market nor the sector are beaten down and out of favor, which is why I bought a basket of bank stocks – including Citi – the previous two times.

And while Citi shares look cheap – at a mere 71% of tangible book value and 10.8 times this year's consensus analyst earnings estimates of $5.72 per share – they're up 60% since the 52-week low last October.

Personally, I'm only interested in stocks like this when they're trading at 52-week (or, ideally, multiyear) lows.

Might Fraser's turnaround plan have legs and we'll look back on the recent rally as the start of a long-term run?

Maybe... but I wouldn't bet on it.

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.