(12/20/2007) Amidst the recent market correction of more than 10%, what should one invest in? Citi, may be?
Market opinion and analysis by Sam Mishra, MBA (MIT Sloan)

Looking for buying opportunities when markets correct is usually a good idea during bull runs. While the markets did not correct 10% the last time I predicted it, they have done so in August, and again, recently. Nov 26 Dow lows were at 12707, after Dow had hit an all time high of 14279 on Oct 11; in other words, the market corrected (14279 - 12707) ÷ 14279 = 11%. Since we are not out of the correction completely, the proverbial buying opportunity during market corrections still exists, because Dow is still more than 1000 points below its all time high, closing yesterday at 13207, down 25 points for the day. Also, I have explained in a previous article why entrusting all your money in the hand of expert money managers is a bad idea, since most of them trail the markets long term. Consequently, one has to decide for oneself which stocks / ETFs (exchange traded funds) one must buy / trade.

In light of the above facts, let me propound a good investment maxim: buying a great security / stock / well-diversified ETF; and holding it for five, ten, fifteen, or twenty years is savvy investing. As opposed to this, buying / selling a stock based on advice from brokerages like Schwab / TD Ameritrade or investment research / banking firms like Goldman Sachs (Goldman) / Standard & Poors (S&P) can be great folly.

Let us use the example of Citigroup stock (Citi for short, with ticker symbol C) to analyze this maxim further, vis-à-vis the latest research reports on this stock from Goldman and S&P. Now, Citi is a big conglomerate, with more than 300,000 employees spread across 100 countries. The company's stock has taken a beating in recent weeks, as have many other stocks within the financial sector, because of subprime woes. As Citi announced billions in write-downs (or losses) because of bad loans to sub-prime and other risky borrowers, other banks like Goldman downgraded the stock from good to not-good / bad, buy to hold / sell, over-perform to under-perform, etc. This helped the stock price to take a further beating. And recently, its ex-CEO Chuck Prince decided to step-down, or was forced to do so. This pulled the stock down some more. Then, there was news that Citi will layoff tens of thousands of employees as part of cost-cutting. Then came blogs that when Citi announces a new CEO, the stock will rally. However, when Citi announced that Vikram Pandit was going to be the new CEO, the stock came down some more (more precisely, the stock came down from 34 to 31 in a couple of days), and today it is trading at a new 52 week low.

What all this noise has done is propel Citi to become the #1 trading stock for the time being. This makes the stock is worth analyzing. As part of my analysis, I looked at various research reports I have access to, because of being an individual investor with multiple IRAs. First, let's deal with the S&P report which came out last week, which rates the stock as a HOLD, with a current price of around $33 and a twelve month target price of $44. If the target is higher than the current, and that too by a margin of more than 30% in a year, should you not be saying BUY, and not HOLD? BTW, S&P equity reports are really bad in predicting stock prices, if you ask me… I might talk about their sub-par equity research reports in more detail in a future article.

Now, let's consider the Goldman report. On one hand, they have included the recent announcement by an Abu Dhabi investment group (read oil money) putting in 7.5 billion US dollars into Citigroup. On the other, they rate the stock a SELL at a current price of $32 or $33. Now, if someone bought it in June for $54, the only reason he should SELL and not HOLD is to take the capital losses off his taxes… And that is a big capital loss to swallow. One of the reasons people don't do well in stock markets is because they buy and SELL a lot of individual stocks (buying an individual stock as opposed to a well-diversified ETF is a bad investment idea to start with). While they make good money on stocks which have done well, they lose money on stocks like Citi which do bad in the short term. Since the brokers make their commissions either way, beware of that broker who advises you that you can always take your losses from just this one bad trade and deduct it from your gains and save on taxes; if you keep offsetting your gains from one stock with losses from another, you can't come out ahead in investing; you will be just another average joe trader! Of course, Goldman is not a small-time broker, but they do brokering in both primary and secondary markets. So, it is in their vested interest to drive down the stock price of Citi, and don't be surprised when Goldman reverses its rating of CITI from a SELL to a HOLD / BUY in as short as six months. In short, how Goldman makes money is beyond the scope of the current article, but if you are an individual investor who dabbles in individual stocks, resorting to the sage advice of venerable Goldman can be as great a folly as reading the S&P report literally.

However, let's suppose you bought Citi for other reasons, including lucrative dividends it has been paying since 1986. Let's further suppose that you bought the stock somewhere between 35 and 45, let's say you bought it at 40. Now, what are the chances that Citi will go back up to 40 in the next 3 to 5 years? I say, pretty good. Why? Because with a revenue base of close to $150 billion dollars, the stock was at $54, and today, the stock is down by almost 50%, and the revenue base is still the same! So, with a revenue base of $150 billion, the stock can rally 50%, and go above $40. In fact, if you have an investment horizon of 20 years, you will see CITI making new all-time highs, i.e., the stock will trade again at $50 plus within the 20 years, but who has the patience to wait until then?

For someone who wants to buy low and sell high, Citi is a good stock to buy below 35 (in fact, it was trading below 30 today) and sell above 50. And of course, I am talking about a five, ten, fifteen, or twenty year investment time horizon. Why twenty? Because sometimes the markets don't move for more than fifteen years! Remember how Dow went down, up, down, up, between 1964 and 1980? And stood at the same place in 1980 as in 1964? In other words, no one can predict the stock market moves. However, if you look at the DJIA charts for the last 100 years, the general trend is up. So chances are higher that given sufficient time (read ten or fifteen years at least), the markets will continue to rally, because the US economy is still the largest, and is growing year over year for the next forseeable future. If that happens, and if the bull run is generally intact (even allowing for a bear run or two between now and 2020), what do you think is going to happen to Citi, which is trading close to 30? Do you think it is going to go to 20 (like Goldman thinks, else why should they be saying SELL and not BUY), or do you think it is going to be 50 again, someday, not in the near future, I am not saying in the next twelve months, but in the next five, ten, fifteen years?

With more than $146 billion in current market cap and $146 billion in revenue, Citi is a well-diversified business with tentacles spread worldwide. It has a 2.9% per year dividend yield for the last five years, and has been paying dividends since 1986. $7.5 billion in capital infusion from Abu Dhabi is also a good endorsement to the company's business strength. Citi is the giant when it comes to consumer banking, investment banking, and everything in between. Buying Citi is like buying a well-diversified financial ETF…

Consequently, I recommend buying the stock at its current trading price of less than $30 per share, and holding on for a period of five / ten / fifteen / twenty years. When the stock climbs back up to $50 and above, the savvy investor can take profits by selling. Also remember than anything can happen on the way. For example, Citi might divest / sell-off some of its businesses, and as a shareholder, you can benefit from those moves, provided you own the shares!

Article Summary: What I have recommended here is an investment, and not a get-rich-quick-trade… If you are a trader and not an investor, and if you are looking for immediate pay-offs within the next 12 months or so, this recommendation is not for you. Savvy investing requires an outlook longer than the next 12 months. Savvy investing also requires one to diversify one's portfolio and spread the risks of investing into a lot of securities / stocks / ETFs / mutual funds. The current market correction of more than 10% has created a good buying opportunity. In general, one should invest in a well-diversified ETF to diversify the asset base one invests in. However, if you are prone to dabbling in individual stocks, dabble in something which represents a well-diversified business. Dabble in Citi. Normally, buying individual stocks is a bad idea; and buying sector / index / country ETFs is a better idea because you reduce your risks by diversifying. However, Citi is an exception, since it is a giant, well-diversified business (in that sense, Citi stock is like an ETF itself), and has been paying regular dividends for the last twenty years. In fact, if I owned Citi today, one of main reasons I would sell the stock is if the company announced that it would stop paying dividends. Citi's current 52 week low has created a buying opportunity, the recent SELL recoomendations from S&P and Goldman not withstanding… Also, one need not be alarmed by the appointment of Dr. Vikram Pandit to be the CEO. Anyone, who is appointed as the CEO of such a large business is bound to be somewhat of a free rider. To his credit, Dr. Pandit announced on CNBC interview after his appointment that dividends are here to stay in Citi.

Disclaimer: This article is for educational purposes only. Analysis of stock market conditions is not advice. Recommendation is not advice, either. Opinion that a certain stock / security will go up or down within a certain time frame is not advice to invest in the said stock / security. You understand that the author is not advising you personally concerning the nature, potential, attractiveness, value or suitability of any particular stock / security, portfolio of stocks / securities, or investment strategy / tactics. What you invest in is at your own risk. Please read our Terms of Service.

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