Can Citigroup See a Turnaround?

With shares of Citigroup (NYSE:C) trading around $46, 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 has reached an agreement with a group of 18 institutional investors to pay $1.12bn to settle claims over the alleged sale of faulty residential mortgage based securities (RMBS) before the 2008 financial crisis. The recent agreement will resolve the cases pertaining to the certain legacy Securities and Banking private-label securitization representation and warranty repurchase claims. As per the terms of the settlement, Citi will make a binding offer to the trustees of 68 Citi-sponsored mortgage securitization trusts to pay $1.12bn to the trusts.

Additionally, the bank will pay approximately $100m as certain fees and expenses. The 68 trusts issued in the aggregate $59.4bn of residential mortgage-backed securities and represent all of the trusts established by Citi’s legacy Securities and Banking business during 2005-2008. Once the settlement is approved by the trustees, it will release Citi’s obligation to repurchase mortgage loans sold into the trusts, or make the trusts whole, for outstanding or potential claims for breaches of representations and warranties on the loans. ”This settlement resolves a significant legacy issue from the financial crisis and we are pleased to put it behind us,” Citi said.

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 stabilize. 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

25.02%

16%

14%

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 had mixed 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

-10.40%

0.60%

5.33%

7.44%

1.74%

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 has reached an agreement with a group of 18 institutional investors to pay $1.12bn to settle claims over the alleged sale of faulty residential mortgage based securities. 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 mixed 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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