Conditions Are Perfect for Citigroup Inc Stock to Continue Its Rally

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Citigroup stock - Conditions Are Perfect for Citigroup Inc Stock to Continue Its Rally

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Citigroup Inc (NYSE:C) reported a big earnings topper on Tuesday morning. The numbers (big beats on the top and bottom) sent Citigroup stock higher on the day.

But the stock is giving up some of those gains on Wednesday despite broad market strength.

Is that surprising? No. For a large part of the past 5 years, Citigroup stock tracked passively sideways. But over the past year, its rallied nearly 30%. On the heels of such a huge rally and after a really good report, it’s not surprising to see some investors profit taking.

Does the selling mean the rally is over? I don’t think so. Big bank stocks have been in rally mode. This rally will continue as long as the U.S. economy keeps gaining momentum and interest rates increase.

Right now, the outlook for that to continue is promising. So I say stick with Citigroup stock.

The Rally In Citigroup Stock Should Continue

Things are going well for Citigroup right now. Revenues are up, led by growth across most of the company’s operating segments. Margins are trending higher, thanks to strong expense management. Net income is up, and earnings per share are up more (big buybacks). Return on assets is tracking higher, as is return on tangible common equity.

Moreover, management is paying the success forward to shareholders. Citigroup returned $17 billion to shareholders in 2017.

Its no wonder Citigroup stock has more than doubled from its February 2016 lows. And Citigroup can keep heading higher. If you take a look under the hood at what’s powering Citigroup’s strength, you find sustainable drivers.

The US economy is as healthy as it has been in several years. Third quarter GDP grew 3.2%. Not only does that represent an acceleration from the second quarter’s 3.1% reading, but it also marks the first time since 2014 that GDP growth was 3% or more in back-to-back quarters.

There is a mix of tax reform optimism in there (business confidence is soaring, as is investment). And there is also a mix of America finally fully shaking off the lingering aftertaste of 2008-09 (the personal savings rate have dropped dramatically recently, leading to a surge in consumer spending).

Those drivers will persist. Tax reform hasn’t even been implemented yet, so the best is yet to come on that front. And while the savings rate won’t come down much from here, it should stay low because Americans have been saving for years. This low savings rate will keep consumer spending strong.

Overall, the US economy will remain strong and interest rates will continue to head higher into the foreseeable future. That means Citigroup stock will continue its rally.

Automation Is A Risk, But Not Right Now

I don’t think this rally lasts forever, however.

The biggest risk to the growth narrative is automation. Automation threatens huge swaths of the currently healthy job market. Once automation fully kicks in, a lot of people will lose their jobs (one firm estimates the number of displaced workers could be as high as 800 million by 2030).

This massive unemployment rush will be a large obstacle in the American economic growth narrative. It will also keep consumer prices low since automation is presumably a cost saving measure (and low prices mean low inflation).

When all that comes to fruition, banks will struggle.

But that time is not here and now. Automation at scale is still 95% dream, 5% reality. Until it becomes more reality than dream, this risk won’t be priced into bank stocks.

Bottom Line on Citigroup Stock

Citigroup stock has been a winner, and if you were fortunate enough to have been on this train from the bottom, congratulations are due.

If you’re looking to jump on the bandwagon now, I don’t think its too late. Citigroup stock still trades at under 1x price-to-book, which is pretty good against the backdrop of a healthy US economy. That is also the lowest price-to-book multiple by far among big banks.

Valuation isn’t overextended. The growth drivers have longevity. Put those two together, and its easy to see why Citigroup stock can and will head higher.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.  

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/conditions-perfect-citigroup-inc-stock-rally/.

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