I did a deep valuation analysis on Citigroup today, digging into their earnings reports for the last three years as well as analyst estimates for the next 4 quarters. Here are my conclusions.
In forward P/S terms, Citigroup is nearly the cheapest it has been in the last three years. However, in forward P/E terms, it's nearly the most expensive it has been in the last three years. The valuation in P/S terms may be more important, because analysts expect the earnings numbers to climb steeply back up to meet the sales numbers within a few years. (Roughly 23% earnings growth rate expected in the next 4 quarters, and nearly 4% growth rate for sales.)
However, there are risks. Analysts are predicting a steep drop-off in sales next quarter due to the pandemic's impact on consumer credit, which is sharply down. Then they expect sales to recover from there. However, an alternative scenario is that the pandemic is prolonged and we don't get a vaccine this fall, in which case credit might continue to deteriorate and Citigroup's sales might fall off even more steeply in Q4 than in Q3.
I'm also worried about the outlook for the mortgage market. Current housing prices are artificially high, but there's a reckoning coming for residential real estate whenever Congress allows mortgage forbearance to expire. (Expiry is scheduled for August 31, but there's talk of extending it to next year.) If forbearance is extended, then renters and borrowers may not pay, which would hurt bank earnings. If forbearance is allowed to expire, then housing prices will fall and mortgage sales numbers will fall with them. Banks would seem to be in trouble either way, and I'm not certain analysts have accounted for this.
Thus, I will not be entering Citigroup here. I expect the narrative around banks to remain negative for the next quarter as bankruptcy and default rates continue to rise and credit continues to deteriorate. There's a good chance we will retest the bottom near 36/share sometime in the coming quarter; if so then I will revisit the numbers on Citigroup and consider an entry there.
(P.S. It's also worth pointing out that under normal market conditions, Citi's sales and earnings appear to grow linearly in dollar terms, which means that growth decelerates over time in percentage terms. In other words, Citigroup is not a compounder. That's reason enough to only trade this stock, not buy-and-hold for the long term.)
Great work and thank you for this! Two questions. One, what is the line running through your candles and two what type of candles are those? Thanks!
ChristopherCarrollSmith
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@Bweber1982, the blue line running through the candles is the session VWAP, which is an intraday indicator that I honestly just forgot to turn off. The candles are just regular candles (second in the list of candle types). I've also got two volume indicators here. Regular "Volume," shown along the bottom, and the "Volume Profile (Visible Range)" shown on the right. The volume profile shows how much volume was located at any given price, on the assumption that if it was a high-volume level in the past, it will be again. The horizontal red line indicates the price with the most historical volume, which should act as a strong support or resistance level.
Chaython
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All banks look this way.
scheplick
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Thanks for this analysis. Interesting to see banks seeing their trading revenue spike
ChristopherCarrollSmith
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@scheplick, yes! That's mostly because of bonds. Investment banks traditionally keep a good portion of their investment portfolio in bonds. As bond yields fall, bond prices rise. Thus falling bond yields have greatly increased the price value of banks' bond portfolios. But, we may have hit a ceiling for bond prices with bond yields on the floor near zero, which is why JPM CEO Jamie Dimon said on the earnings call that he expects trading revenues to be cut in half next quarter.
swara7kadir
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Why don't you short it ?
ChristopherCarrollSmith
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@swara7kadir, first because it's undervalued, and second because too many vested interests want stocks to go up rather than down. Playing stocks short is like betting against the house at a casino IMO. That's why I'm mostly a long-side trader, with just an occasional short hedge. :)
@swara7kadir, at these valuations, a short bias is certainly reasonable. However, I've also found that the market can remain irrational longer than I can remain solvent, as the old saying goes. :)