On Tuesday, Mad Money’s Jim Cramer claimed that Bank of America (BAC) was the best way to play the economic recovery. Well, on Thursday night he turned his attention to Citigroup (C). Many investors have been turned off to these so-called “zombie banks” because they can be extremely complicated stocks and there has been a lot of doubt over continued exposure to consumer credit and complex debt instruments. Not to mention the fact that, by virtue of being a tax payer, most Americans are already “investors” in these two major financial hubs.
“Yes, tonight, I am recommending the stock of — Citigroup. Yeah, you don’t have to adjust your hearing aid. I’m recommending the stock of right here, right now. The one that we own, we the taxpayers own 34% of…Buying the stock is the best way to serve yourself and to serve your country, the perfect combination of patriotism and profits. Before you laugh, before you assume that I wasn’t diagnosed with A.D.D. as a child but with a possibly terminal case of S.T.U.P.I.D. Let me give you not one, not two, not three, not four, but five reasons why this stock should be bought right here and bought all the way down to $3, if it ever sees that level again.
Citigroup is dirt cheap. Some banks sell off of earnings, some off of book value, some off of both. Now, it is hard to figure out what a bank is worth. It’s really difficult to figure out what Citigroup is going to the so-called normalized earnings, I give up. I can’t figure it out. I spent the last three days on this. But I peg book value at a glorious $4 a share. A bank like Citigroup with a global franchise and profitability in hand should sell at a minimum at 1.5 times book value. By the way, book value is actually going up because they’re making money. You know what that means? It means you have a $6 stock masquerading as a $3.75 stock.”–CNBC’s Mad Money 8/6/2009
Besides the fact that Citi is still trading at a very attractive price, Cramer also points to the fact that the government could sell its stake in Citi by September 10th. He claims that, even though the bank’s dominance in the U.S. has taken a severe hit recently, it is still the dominant bank in 108 countries worldwide. Furthermore, they are spinning off bad loans into Citi Holdings, which leaves Citibank with the profitable divisions of retail banking, global services, and investment banking.
The first four reasons seem fairly reasonable, but it was the fifth reason that made me concerned about Cramer’s short term memory. His fifth and final reason why he is a buyer of Citi is because of the company’s strong management! That flies in the face of everything that Cramer has said about Citi for months, including this quote from November when he inducted CEO Pandit to the Wall of Shame saying, “most under-performing, value-destroying burden to shareholders of a CEO out there.” Strong management, huh? Cramer removed Pandit from the Wall of Shame about a month later after Citi secured $20 billion in bailout money and $300 billion in loan guarantees. To me, a bailout does not strong management make.
Citi is cheap and will be a huge benefactor if the global economy continues to recover, but to turn a complete about face on management seems somewhat disingenuous. At Ockham, we are maintaining our Fairly Valued stance on Citi shares, with the understanding that the stock is still risky but over the next few years will almost undoubtedly trade much higher.