Considering the rise in loans, fixed income, and Common Equity Tier 1 ratio at the end of fiscal 2016 fourth-quarter, on February 7th, we had recommended investing in a high or above option contract of Citigroup Inc (NYSE: C), offered by any of the reputed binary brokers. The stock was trading at about $56 when the suggestion was made. A week later, the stock closed at about $60 thereby resulting in a profit from the recommended trade. However, the Trump rally pushed the stock further northwards to a 12-month high of $62.53. Considering the fundamentally overstretched valuations, as explained below, we anticipate a correction in the stock.
Most of the arguments in favor of Citigroup’s attractive valuation speak about the bank’s exposure in Asia and the probable risks it poses on the top line of the bank. However, it should be noted that Citigroup’s Asia and LatAm branches generate better returns than their US counterparts. While the return on average assets (ROA) was 0.73% in North America, it was 1.52% and 1.0% in the LatAm and Asian divisions. Thus, it can be inferred that the bank does not suffer any kind of low valuation because of branches outside the US.
The stock is currently trading at a PE multiple of 13x. Considering the pressure on the net interest margin for the past several quarters and the bank’s forecast of only 286 basis points for the rest of fiscal 2017, the valuation seems to be fair.
Another important factor to consider is the interest rate sensitivity. Citigroup has the lowest interest rate sensitivity among the big four banks (JP Morgan Chase, Bank of America, Wells Fargo & Company, and Citigroup) in the US. Thus, a rate hike will not result in a sharp rise in the bottom line as with the other three banks. It is one of the main reasons for the bank to command a little lower valuation. Thus, considering the 39.1% appreciation in the past seven months, we expect the stock to undergo a correction.
The price chart indicates a bearish shooting star formation. The stochastic oscillator has formed a negative divergence with the price. This indicates the possibility of a technical correction in the share price of Citigroup.
A binary trader can generate handsome returns of about 80% from the analysis by purchasing a put option having an expiry date on or around March 22nd. To begin the trade at an advantage, the trader should also time the entry near $61.50.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
