As word spread that hedge fund guru Ed Lampert has silently amassed a stake valued at over $800 million in the world's largest bank,
, frustrated investors cheered in hopes that Wall Street's sleeping giant will finally wake up.
Shares of Citigroup, which have been stagnant for most of this decade, jumped $2.12, or 4%, to $54.91 on Wednesday after Lampert disclosed in a regulatory filing that he's been buying shares of the banking juggernaut since last year.
The news comes as Citigroup has been slowly losing credibility with investors as its expenses have continued to grow faster than its revenue despite a series of promises that change was at hand.
Lampert, known for taking an active role in companies in which he holds stakes, has been a relentless cost cutter, and investors are praying that his foray at Citi will bring about long-awaited gains in the company's stock price.
"I'm thrilled to see Lampert getting involved here, because while we see plenty of value in
shares of Citi, we're very impatient to get something done," says Carl Salvato, a portfolio manager with Great Companies, which has $400 million under management. "There's been some turnover in the management ranks at Citigroup, but come on. Don't just rearrange the chairs on the decks of the Titanic. Let's do something more dramatic here."
But any dramatic move -- at least one spurred on by Lampert -- is far from a sure bet.
Lampert's spokesman declined to comment for this story, but at just 0.3% of Citi's shares outstanding, his stake is relatively small for an activist to gain much traction. Furthermore, while Lampert has been an active investor in the retail sector, most notably serving as the architect of
, he has no history of waging proxy fights or the like.
The so-called Guru of Greenwich has held his position in Citi for more than a year. He initially took a position in the company in the first quarter of 2006, but the
Securities and Exchange Commission
granted his fund confidentiality on the stake for all four quarters of last year. That confidentiality treatment, which has also been granted in certain situations for investors who can move the market, such as
Warren Buffett, expired on Tuesday.
According to the filings, Lampert boosted his stake in Citigroup in the first quarter of 2007 by 40% to 15.2 million shares from 10.9 million at the end of last year.
Cutting Costs at Fat Citi
While Lampert's motives are unclear, Citigroup does have issues that fit the bill for him to come in and shake things up. The most prominent is the company's bulging expense line, an issue Citi CEO Chuck Prince has been criticized for failing to address.
Coming in and slashing bloated costs, meanwhile, is Lampert's modus operandi.
Shares of Sears Holdings, which Lampert cobbled together by merging
, have rocketed over 80% since the beginning of 2005. The move came as Lampert essentially thumbed his nose at the retail industry's same-store sales race between
to cut costs, raise prices and deliver profits to his delighted shareholders.
Lampert employed a similar strategy at
, where he accumulated a stake in the late 1990s. Under his influence, shares of the auto-parts retailer more than doubled in less than three years as it focused on profitability and return on investment at the expense of revenue growth.
That sort of strategy is a far cry from Citi's practices. Last year, the company's earnings fell 8.7%. Its expenses rose 15% to $52 billion, while total revenue inched just 7% higher to $89.6 billion.
"We threw up our hands last year because positive expense leverage was promised to us many quarters prior to that, and it never came," says Salvato.
His fund bought stakes in Citigroup,
Bank of America
years ago, and Citi has been a consistent laggard.
"Citigroup is a franchise company with a premier name, and we're not selling it, because we believe its potential will be realized," says Salvato. "We're a growth manager, but we find such compelling value in Citi that we hope somebody is going to do something to help us realize it."
Regardless of whether he is the one to push for change at Citigroup, there's plenty of reasons to recommend the stock to a value investor such as Lampert.
Citigroup pays a dividend with an annual yield of 4.1%. That approaches the current yield on a 10-year Treasury note. Also, the company is repurchasing shares at a fast clip, returning value to shareholders, and the market is valuing it at just over 10 times Wall Street earnings estimates through 2008.
Then there are signs that Prince is starting to fight for his survival. Citi recently announced plans to slash 17,000 jobs as part of an effort to cut $4 billion in costs annually in the coming years. Some investors have called for it to take a step further and break-up the sprawling organization, splitting its consumer banking divisions away from its global investment banking operations.
If perceptions shift on Wall Street and Prince manages to cut through the veneer of public scrutiny that is dogging his reputation, Citigroup shares at $55 could suddenly look remarkably cheap.