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Best Stocks for 2017: Citigroup Inc (C) Stock Is Undervalued

Look for Citigroup to make real strides in 2017

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Editor’s note: This column is part of our Best Stocks for 2017 contest. Ken Trester’s pick for the contest is Citigroup Inc (NYSE:C).

Best Stocks for 2017: Citigroup Inc (C) Stock Is Undervalued

The financial stocks — represented by the Financial Select Sector SPDR Fund (NYSEARCA:XLF) — have been on an absolute tear since Donald Trump was elected President of the United States, as you can see from the chart below.

Expectations for less regulation on the banks and higher interest rates sometime in the near future have pushed the financial sector higher by an eye-popping 19% since early November on volume far greater than we have seen for most of 2016.

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However, while you might expect that these stocks have run too far, too fast, one of the biggest names in the space is actually presenting quite the value play.

Citigroup Inc (NYSE:C) is my pick for the Best Stocks for 2017 contest for several reasons, including its low price/book value ratio, expectations for higher interest rates over the near term and an improving technical picture that could send the stock much higher.

Citigroup is Relatively Cheap

Compared to four of its peers — JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS), Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) — Citigroup has the lowest price-to-book value ratio, coming in at 0.8. BAC is trading in line with its book value, while JPM, GS and MS are all trading with price to book values of 1.2 to 1.3, indicating that they are relatively overpriced when compared to Citigroup.

When I recommend stock options to my subscribers in Maximum Options and Power Options Weekly, I always make sure that I am focusing on undervalued, or cheap, options that provide the biggest profit potential, and that is the same approach I am taking now.

Since we are looking for a stock that is going to perform well over the next full year, finding one that is undervalued at current levels is key. The regional banks are likely to move higher as well, but C stock has been a laggard amongst its peers lately, so I’m betting that it will make a stronger recovery.

One of the factors that has been keeping Citigroup down is that it has a lot of international exposure. With foreign currencies all weakening due to the strength of the U.S. dollar (USD), the international picture is not looking good for the banks right now.

However, I think the dollar has gone too far at current levels, so if other currencies begin to strengthen against it, that would be a big help for C stock. With the British pound down to ~1.25 and the euro almost at parity against the dollar, it should flatten out eventually, although I cannot provide a timeline for when that might happen.

Also, international exposure is not always a bad thing. In Citigroup’s case, its Mexico unit (Citibanamex) is the country’s second-largest bank and acted as a much-needed cushion during the U.S. financial crisis.

Sure, investors started throwing out their Mexico exposure when Donald Trump got elected — but I think that is ridiculous. Trump is not going to do much to Mexico, period; eventually, Wall Street will realize that. And in the meantime Citi is investing in reaching both wealthy clients and the “unbanked.” More than half of the Mexican population doesn’t have a bank account, making it a huge potential growth market for C stock.

Citigroup also carries a far lower forward price/earnings ratio than its peers. For example, JPM, GS, BAC and MS currently show forward P/E ratios of 13.4, 13.9, 14.8 and 14.2, respectively, whereas C is trading at a much lower 11.6 ratio.

Most stocks, even outside of the financial sector, are either fairly or fully priced, but I don’t think Citigroup is at current levels, so its share price still has room to move higher.

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