Should I Buy Citigroup Inc (C) Stock?

With 209,000 employees in more than 100 countries, the Citigroup brand is one any seasoned financial services customer would recognize.

Citigroup Inc (NYSE: C) stands as the third-largest bank in the U.S., and is generally considered to be at the top of the heap of American banking institutions, along with Wells Fargo & Co. ( WFC), Bank of America Corp. ( BAC) and JP Morgan Chase & Co. ( JPM).

As 2018 draws to a close, Citigroup is looking to move beyond its recent history of stalled earnings and a lagging stock price relative to its big bank competitors, and is focused on establishing itself as the global leader in global payments processing and customer engagement.

Does Citigroup have a good head start on 2019? Here’s what Wall Street insiders have to say.

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Citigroup stock at a glance. The banking behemoth posted revenues of $71.4 billion in 2017, with net income of $15.8 billion.

Citigroup stock is hovering around $65 per share, down from $80 earlier this year and is down 13 percent year-to-date. Yet the upside for Citigroup stock is ample as consensus analyst outlook pegs the bank’s share price at $85 in the next year.

Citigroup, like most big banks, received a rocket boost from the reduction in corporate tax rates from new tax legislation passed by Congress in December 2017. Additionally, rising consumer sentiment and increased business borrowing (for now, as the Federal Reserve continues to boost interest rates) has bolstered the bottom line at the six largest U.S. banks, which collectively raked in $30 billion in revenue in the last quarter — that’s 20 percent higher than the same period in 2017.

Citigroup’s market share stands at around $160 billion, and the stock is paying shareholders a decent dividend rate of 2.7 percent.

Pros to buying Citigroup stock. There’s a discernible sense among the professional investment class that C stock has been oversold and represents a high-quality opportunity at a discount.

Equally, there’s a sense of as yet unmet expectations over the Federal Reserve’s hiking the federal funds rate again on Sept. 26 from 2 to 2.25 percent, with expectations of one more rate hike in 2018 and three more in 2019, according to economists.

“We’re seeing a rise in bank stock prices in recent trading, possibly due to rising interest rates and the higher cost of money,” says Angelo DeCandia, professor of business at Touro College in New York. “The sector had been less than inspirational over the past year, but has suddenly surged to the top of many hot-stock lists.”

Other industry experts note that bank profits are largely driven by loan demand and net interest margin — the difference between a bank’s cost of funds and the interest rates banks charge on loans. That’s a scenario that could mean a green light for bank stocks.

“What investors should focus on is the health of the economy and the shape of the yield curve — that is, the relationship between interest rates and time to maturity,” says Robert Johnson, professor of finance at Creighton University in Nebraska. “As the yield curve steepens — when the rate on long-term maturities is greater than the rate on short maturities — banks’ profits rise.”

[See: 9 Financial ETFs Rising with Interest Rates.]

If interest rates rise gradually, Johnson says he likes bank stocks in general, and Citigroup in particular, to outperform the market. “But if rates rise suddenly and overall economic growth is stunted, bank stocks, and the stock market in general, will suffer,” Johnson says.

Banking stocks will be reliant on the U.S. economy, says Charles W. Mulford, an accounting professor at Georgia Institute of Technology in Atlanta.

“Recent volatility notwithstanding, a strong U.S. economy continues to bode well for the banks and Citigroup,” he says. “With a growing economy, the yield curve should continue to widen, aiding bank net interest income.”

Mulford adds that Citi’s third-quarter results “were strong” and the recently completed stress test allows the bank to continue returning capital to shareholders, both through stock buybacks and an increased cash dividend.

“In terms of valuation, Citi’s forward P/E of approximately 10 is well below normal levels of around 12 and, given that it sells for an amount that is only slightly above tangible book, there is limited downside risk,” he adds. “Near term, Citi will likely trend with the overall market. As the correction ends, however, Citi’s fundamentals should once again assert themselves and provide strong upside action. It is not difficult to see it trading above $100 within the next one to two years.”

Cons to buying Citigroup stock. Market watchers agree that rising interest rates could hurt bank stocks, particularly if the Federal Reserve gets too aggressive with rate hikes.

“Though financial stocks and Citigroup have benefited from the big stock market rally of the last two years, we think that the banks and Citigroup will face some headwinds as we go forward,” says James Demmert, founder and managing partner at Main Street Research in Sausalito, California. “The initial stages of anticipated interest rate hikes historically benefit banks, as we have witnessed over the past two years. However, at this point in the cycle, the rise in rates begins to negatively affect the upward advance of earnings growth.”

Demmert says this is mostly due to the effect that higher borrowing costs have on the demand for loans.

“As rates rise, we come to a phase in the cycle where the demand for loans becomes tempered by the cost,” he says. “The slowdown in lending slows earnings growth for interest rate-sensitive companies at this point in the cycle. That can be a headwind for Citigroup and other bank stocks. We expect the banks to underperform other sectors that are less sensitive to rising rates.”

[See: 9 Bank ETFs to Invest in Finance Reform.]

The bottom line on Citigroup stock. The primary risk facing Citigroup and the other banks is whether economic and political uncertainties will weigh heavily on the U.S. economy and push it into a significant slowdown, or worse, a recession, Mulford says.

“Banks have a very tough time in recessions as loan volume dries up and credit quality wanes,” he says, “leading to big additions to the loan loss reserve.”

While Citigroup stock is attractively valued, its fortunes will rise and fall in the next few months on the strength of the economy.

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Should I Buy Citigroup Inc (C) Stock? originally appeared on usnews.com