Can Citigroup Recover?

With shares of Citigroup (NYSE:C) trading around $47, is C an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Citigroup is a global diversified financial services holding company providing consumers, corporations, governments, and institutions with a broad range of financial products and services. It operates in two segments: Citicorp and Citi Holdings. The company’s products and services are consumer banking and credit, corporate and investment banking, securities brokerage, wealth management, and transaction services to consumers, corporations, governments, and institutions worldwide.

Citigroup is expected to pay a $7 billion penalty for packaging bad mortgages in the run-up to the financial crisis, according to people close to the matter. The Justice Department and Citigroup are expected to announce the deal sometime this week. Negotiations reached a dead end a few weeks ago when the Justice Department threatened to sue the bank if it did not agree with the government’s proposal. At one point in the talks the government was asking Citigroup to pay $10 billion, much more than what Wall Street analysts had estimated. Citigroup will pay $4 billion in cash and the rest of the penalty will involve soft dollar penalties like mortgage modifications and other forms of relief to homeowners. The bank will also have to pay certain state attorneys general involved in the case. The deal will come as a relief to Citigroup, which at one point was facing legal action from the Justice Department, removing a potential legal obstacle that would have had an impact on its share price. The bank argued that its pre-crisis mortgage activity should not be equated to J.P. Morgan Chase (NYSE:JPM), which sold far more bad mortgages before the crisis. J.P. Morgan Chase reached a landmark $13 billion settlement with the Justice Department last November.

T = Technicals on the Stock Chart Are Weak

Citigroup stock has struggled to make significant progress over the past several quarters. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Citigroup is trading below its rising key averages which signal neutral to bearish price action in the near-term.

C

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Citigroup options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Citigroup Options

22.52%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Steep

Average

September Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Citigroup’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Citigroup look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

0.78%

123.68%

589.53%

41.05%

Revenue Growth (Y-O-Y)

-2.19%

-0.56%

30.48%

11.38%

Earnings Reaction

4.35%

-4.34%

-1.49%

1.96%

Citigroup has seen increasing earnings and mixed revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Citigroup’s recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has Citigroup stock done relative to its peers, JPMorgan Chase (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and sector?

Citigroup

JPMorgan Chase

Bank of America

Wells Fargo

Sector

Year-to-Date Return

-9.31%

-4.45%

0.03%

14.87%

1.28%

Citigroup has been a poor relative performer, year-to-date.

Conclusion

Citigroup is a bellwether that offers essential financial products and services to consumers and companies worldwide. The company is expected to pay a $7 billion penalty for packaging bad mortgages in the run-up to the financial crisis. The stock has struggled to make significant progress over the past several quarters and is currently pulling back. Over the last four quarters, earnings have been rising while revenues have been mixed, which has produced conflicting feelings among investors. Relative to its peers and sector, Citigroup has been a poor year-to-date performer. WAIT AND SEE what Citigroup does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

More from Wall St. Cheat Sheet: