Updated with Citigroup's latest share price, analysis.
NEW YORK (
) -- Quotes on
shares were flashing red on Monday, and it's a sight that stockholders may want to get used to, at least in the near term.
The stock was off 4% to $4.66 in afternoon trades after the U.S. Treasury officially kicked off the exit of its bailout-related stake in the recovering bank's common stock, announcing it would begin selling 1.5 billion shares of the 7.7 billion total. Volume was above 920 million with roughly two hours left in the session.
Citigroup's shares had already been
in repeated runs above $5 last week, despite the company's strong first-quarter profit report, and the pressure of these shares finally coming to market isn't likely to help matters. Where the stock goes from here also has to factor in where it's been, and it's easy to understand the urge for some profit-tacking, given the shares had appreciated more than 45% in 2010 through the end of last week, most of it since March. The stock hasn't closed above $5 since mid-October 2009.
Dr. Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette, expects the near-term pressure on Citigroup shares will be modest, and his research points toward the stock being likely to clear the $5 hurdle by the end of the year.
"It's possible if
Treasury does large share sales in the open market that will have a negative impact on
Citigroup's share price," he says. However, "I think that's probably baked in because investors have been warned well in advance of the share sale and the Treasury's been pretty clear that they planned to do it through the open market sales."
Wilson says the quicker Treasury sells its shares, the more likely it will ensure a profit on its stake. As of Friday's close at $4.86, the Treasury had a paper profit of about $2.4 billion on this first batch of 1.5 billion shares it's selling through
. Its cost per share is $3.25 each.
Using a "geometric Brownian motion model," which is a type of mathematical analysis, Wilson says he determined the likely price for Citigroup's shares by mid-December would be $5.57 each. Wilson used the $4.86 closing price on Friday for this analysis, so the model isn't based upon Monday's pullback.
Wilson says his research found there was a roughly 10% chance that the stock could end up below the Treasury's breakeven point before the sale of the entire stake is completed.
"From an investor's point of view, that's not a big deal," Wilson says, about the potential volatility in the stock, which has been trading at least a half billion shares per day for the past three months and saw total volume climb above 5.4 billion last week. "The people that are buying Citigroup that have a long term horizon ...
I think they're prepared for ups and downs."
For his part, Richard Bove, an analyst with Rochdale Securities, was vocal on Monday about the positives he sees at Citigroup, although he acknowledged the Treasury overhang would be an issue until the stake was completely sold. He told
that he estimates the company has normalized earnings power of about 70 cents a share, and that it could run up to $8.50 once the Treasury is out of the picture.
"If you're looking at the fundamentals alone, the stock should be a buy," Bove said during his appearance.
The Treasury announced the plans to sell its stake by the end of 2010 in late March and Wall Street has been waiting for details of the plan since then. It had originally planned to participate alongside Citigroup in the share sale related to the company's TARP payback plan in December, but the shares priced at $3.15 each back then, meaning the Treasury would have had to sell them at a loss.
In late 2008, Citigroup was propped up by government capital injections totaling $45 billion. Citigroup re-paid half of its bailout tab at the end of 2009 in conjunction with an equity offering in December in which it raised roughly $17 billion.
--Written by Laurie Kulikowski in New York.