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, a bank that accepted U.S. taxpayer money in the bailout from the 2008 financial crisis is back in trouble again, this time due to allegations about weaknesses in it’s anti-money laundering controls and its failure to uncover a case of document falsification at its Mexican subsidiary Banamex, an incident that led to a $400 million fraud. The case of alleged fraud in Mexico relates to the bank’s loans to Oceanografia, an oil servicing company, connected to former Mexican President Vicente Fox. Investigators at the U.S. Federal Bureau of Investigation are now looking into the issue.

In a letter to shareholders Citi’s CEO Michael Corbat said that, “We continue to investigate what took place in Mexico and are working to identify any areas where we need to strengthen our controls through stronger oversight or improved processes.” During a recent speech Preet Bharara, the United States attorney in Manhattan, explained his belief that investigations into wrongdoing on Wall Street should go beyond the individuals involved and extend to the companies that employ them. “Effective deterrence sometimes requires that institutions be punished, because sometimes it is the institution that has failed,” he said at a conference for Wall Street lawyers.

T = Technicals on the Stock Chart Are Weak

Citigroup stock has struggled to make significant progress over the last couple of quarters. The stock is currently pulling back and may need time to consolidate before heading higher. 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

24.76%

10%

8%

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

Put IV Skew

Call IV Skew

May Options

Steep

Average

June 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 small 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 Increasing 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?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

123.68%

589.53%

41.05%

29.47%

Revenue Growth (Y-O-Y)

-0.56%

30.48%

11.38%

5.59%

Earnings Reaction

-4.34%

-1.49%

1.96%

0.2%

Citigroup has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with 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

-8.92%

3.27%

9.57%

9.49%

4.35%

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 introuble due to allegations about weaknesses in it’s anti-money laundering controls and its failure to uncover a case of document falsification at its Mexican subsidiary Banamex. The stock has struggled to make significant progress over the last couple of quarters and is currently pulling back. Over the last four quarters, earnings and revenues have been rising. However, investors have had conflicting feelings about recent earnings announcements. Relative to its peers and sector, Citigroup has been a poor year-to-date performer. WAIT AND SEE what Citigroup does this quarter.

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