Citigroup Shares Hamstrung Since Report

New York ( TheStreet) -- Citigroup's ( C) stock has languished in recent weeks, exemplifying the continued troubles of the big financial firm and observers say they don't foresee a recovery in the shares any time soon.

Shares of Citi, which dipped below $1 in early March, ran up in the back half of summer as the financial institution executed a $58 billion preferred-to-common stock exchange beginning in late July. A summer market rally in the broad market was a contributing factor, and the bank sector on the whole did well.

The share swap was formally completed on Sept. 10, but Citi's stock topped out on Aug. 28 at $5.23. Shortly after that the shares pulled back and have mostly hovered in the upper $4 range. But since Oct. 14, the day before the company reported its third-quarter results registering a small profit, the stock is off nearly 20% and just this week closed below $4 for the first time since August 12.

The Citi Trade

Other big banks including JPMorgan Chase ( JPM), Wells Fargo ( WFC), even U.S. Bancorp ( USB) have seen their shares rise in the double digits on a percentage basis since July. Bank of America's ( BAC) stock has actually fallen since the end of July - but the litigation-heavy Southern bank, which is searching for a new CEO, is another story.

Furious trading in Citi shares has also calmed since the summer. The stock's average daily three-month volume still stands at 775 million, but that's a level it's reached only six times since mid-September.

An investor on the Yahoo! Message Board on Citi revealed his and likely other investors' frustrations regarding the stock when he said on Wednesday: "This Stock Sure SUCKS. The DOW is making triple digit gains and Citi is struggling to hold onto 7 pennies."

"The whole group is coming back under pressure," says Bernie McGinn, founder and CEO of McGinn Investment Management in Alexandria, Va. "People are coming to realize that first, this recovery process is horribly uneven. The second thing is that the same toxic assets that were causing the problems seven to nine months ago are still on the books and you realize now that the government didn't have the ability to solve both problems of stabilize and cleanse. It had the ability to stabilize. Now it's time to cleanse."

McGinn says that banks, including Citi, are still figuring out what are these toxic assets worth, what is the government's strategy for getting rid of them and how much more losses banks will have to take.

Over the longer term, Citi's restrictions as a result of the huge government ownership and influence continue to put a damper on its ability to run its business and investors are frustrated, says McGinn, who owns a small amount of Citi shares.

One good example is Citi's decision earlier this fall to sell energy trading unit, Phibro, when it became embroiled in a scandal over the unit's top trader's compensation package. What it should have done was renegotiated the package, McGinn says. "They sell the operation, which was clearly hugely profitable," he says. "That's sort of the straitjacket they're in. It's not the kind of thinking that a sharp business person would do."

Richard Bove, an analyst at Rochdale Securities, also says that inexperienced investors looking to make quick-hit money and being too bullish on an economic recovery, without truly digging into a company's fundamentals, are to blame for Citi's decline following earnings.

"All through next year we're assuming the company loses $8-9 billion per quarter on loan losses," he says. "Anyone surprised simply wasn't looking at the company. I think that it's representative of that fact that people who are buying banks stocks don't seem to want to look at the fundamentals, that banks won't make money until the second half of next year."

Citi's main priority is to return to "sustained profitability" and growth, it says.

Citi's net credit losses were $8 billion in the third quarter, down slightly from the second quarter. The company's total allowance for loan losses rose to $36.4 billion, or 5.9% of total loans, it said.

But the company is making progress in an ongoing turnaround mission, even if it is likely at the behest of regulators. Citi Holdings, the so-called bad bank, reduced its assets by $32 billion in the third quarter to $617 billion. The company reduced its toxic assets by $19 billion in the quarter between asset sales and run off. Still, assets in Citi Holdings are down less than 10% since the first quarter -- the same time the company announced the splitting of the two businesses.

Citi Holdings' assets are expected to decline by at least another $25 billion in the fourth quarter as the company officially completed the sale of Nikko Cordial and Nikko Asset management on Oct. 1, it said.

Cassandra Toroian, the chief investment officer of Bell Rock Capital in Paoli, Pa., says while traders were dipping in and out of Citi's stock when it was under $4, "core investors" involved in the stock will have to be patient going forward since "there isn't going to be anything to propel it forward for a while," unless a major event like selling a major asset or a change in management occurs.

"Those items could be seen as good or bad for the long term health of the company so that could mean the stock could move strongly higher or lower on that type of news," she says. Bell Rock does not own shares of Citi.

--Written by Laurie Kulikowski in New York.

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