Citigroup Bet Could Win Big: Is It Safe?
NEW YORK (
) -- Six months ago, when
Citigroup
(C) - Get Report
shares were bouncing between $2 and $3, investing in
financial stocks
looked like a suicide mission.
Since then, the federal government has vowed to support major institutions and prevent executives' bad decisions from threatening the
. Government backing has made these
shrewd bets.
Like
Bank of America
(BAC) - Get Report
,
has become safe because of its riskiness. Insane leverage and a portfolio of bad assets on its books have insulated the company from total collapse because its fall would trigger a chain reaction among small companies.
The U.S. government has become
largest investor and therefore has plenty of incentives to push for its survival. Of the $45 billion Citigroup received from the Troubled Asset Relief Program, $25 billion was converted into stock. The government also agreed to cover 90% of the losses on a $335 billion portfolio after Citigroup handles the first $29 billion.
While Citigroup shares have dropped 34% this year to about $4.50, the company's operating performance has improved significantly. The company swung to a quarterly profit of 49 cents a share in June after posting a $2.44 loss in December. Analysts expect a 19-cent loss for the third quarter, the most positive prediction for Citigroup since the crisis began.
If the shares climb to $20 during the next five years, investors who got in today would enjoy an average annual return of 35%. That's a reasonable expectation considering that Bank of America shares have increased more than fivefold to $17 since March 6.
Citigroup has taken steps to strengthen its balance sheet, including cutting its debt by $237 billion during the first half. This trend, which probably continued into the third quarter, suggests that management has learned from the mistakes that nearly destroyed the company.
It's rare that a low-priced stock from a company with so many problems would fit in a risk-adverse portfolio. However, Citigroup shares could provide some of the growth that a conservative portfolio needs to beat the market. If the company gets its house in order under the government's watch, its shares could jump high and fast.
Government backing doesn't guarantee big returns;
Fannie Mae
(FNM)
and
Freddie Mac
(FRE)
shares have been trading for less than $2 for the past year. Still, a small investment in Citigroup could be very lucrative and relatively safe, but don't bet the farm.
-- Reported by David MacDougall in Boston.
Follow TheStreet.com on
and become a fan on
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.
