Citigroup is a buy, biggest fund managers say

Though the bank's stock is stuck below $5 and its first-quarter earnings fell, investors have been piling into the company. With video analysis on Citigroup's financial results.

By TheStreet Staff Apr 18, 2011 12:43PM

By Frank Byrt, TheStreet

 

If you're an individual investor looking for a rifle-shot buy, Citigroup (C) may not be it, given the compelling alternatives in energy, metals and industrial stocks. But if you follow the wizened heads who run some of the biggest U.S. mutual funds, pay attention.

 

Mutual fund managers are piling into financial services, which badly lagged other sectors last year after rebounding strongly in 2009.

 

That's because Citigroup has been beaten down and may be at a generational low that's worth a look, since it's the world's largest and most diverse financial-services company. Big institutional investors are starting to load up on the stock.

 

Post continues after video on Citigroup's earnings:

On Monday, Citigroup reported a first-quarter profit of 10 cents a share, coming in a penny ahead of the average analyst estimate. However, Citigroup's $3 billion in net income was padded by a $3.3 billion reserve release in the quarter. Revenue of $19.7 billion also fell short of Wall Street's expectations.

As much as some investors hate Citigroup, the business model is solid.

 

A Morningstar analyst put it concisely: "It is at or near the top of virtually all its product categories, including credit cards, consumer finance, retail banking, corporate lending, investment banking and brokerage. The firm operates in more than 100 countries."

 

In the jargon of analysts, the bank has a "a deep moat," which means an unimpeachable position in its business, and since it's currently trading at $4.46 per share and a projected price-to-expected-earnings ratio of 13, you have to wonder when this stock is going to strut its stuff.

 

Standard & Poor's analysts' earnings outlook is for 45 cents a share in 2011 and 54 cents per share in 2012. In comparison, old-school tractor-maker Cummins (CMI) reported fourth-quarter earnings of $1.84 a share.

 

Good stuff, yeah, but here's the difference: Cummins has to face rising expenses in the form of gas, energy and metals, which hurt its operating costs.

 

It may be too early for some investors to start building a stake in Citigroup. Although Standard & Poor's analysts have it rated "buy" and give it four of five stars, the 12-month price target is $6, compared with a current price of $4.42 today.

 

Goldman Sachs (GS) had already been bullish before paring its view on the banking industry last week, saying it moved its view of financial stocks to "neutral" from "overweight" in a research note to clients.

 

Two closely followed bellwethers, the $18 billion Fairholme Fund (FAIRX) and the $80 billion Fidelity Contrafund (FCNTX), believe in Citigroup.

 

Contrafund put a big move on Citgroup in the reporting quarter ending Feb. 28.

 

According to Morningstar data, Contrafund bought 22.4 million shares to raise its stake to 0.57% of outstanding shares, behind Fairholme's 0.6%. Most telling is that Citigroup stock made up 5.3% of the Fairholme fund and almost 1% of Contrafund's assets at the end of February.

 

Citigroup is tied for fifth-largest holding at Fairholme, with Bank of America (BAC) at 5.3% of the fund.

 

Fairholme's Bruce Berkowitz and Contrafund manager William Danoff have been prescient, according to their track records.

 

Nevertheless, the $165 billion American Funds Growth Fund of America (AGTHX) is the largest shareholder, at just a shade more than 1% of assets. What's noteworthy is that this behemoth has increased its financial-services stake to 13%, at year's end, a three-year high for the fund and about double that of comparable funds.

 

Its other sector picks are JPMorgan Chase (JPM) and Wells Fargo (WFC).

So you have Berkowitz at Fairholme, Danoff at Contrafund and a swat team of fund managers of American Growth telling investors they think the financial sector is poised to come back. What do you think?

 

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