Anyone in his right mind might find it foolish to peg the stock market's continued run on a single company, let alone one that was considered Wall Street poison little more than a year ago. But consider that the financial sector provided much of the fuel for the 4.87% gain in the Standard & Poor's 500-stock index during the first quarter of 2010. Citigroup (C) has helped lead the sector's charge.
That's right: Citigroup, the global franchise that was on the verge of trading as a penny stock early in March 2009. The stock is trading at 4.26, after having gained 25% in the first quarter, vs. a 10.8% gain by the 79 financial stocks in the S&P 500 index. Still, Citigroup trades at less than one-tenth its value as of Aug. 8, 2007, when it closed at 49.49 a share.
There are two key reasons for caution toward Citigroup right now, despite signs of an improving economy. First, investors are worried that the U.S. Treasury Dept.'s plan to start paring its 27% stake in the company—it owns 7.7 billion shares—could put further pressure on the share price. (Institutional investors have kept away from the stock out of concern that the government's stake would limit management's freedom to make decisions.) There's also concern that the company may incur further losses by selling such impaired assets as subprime and Alt-A mortgages and auction rate securities from its Special Asset Pool at deep discounts to face value.
The Treasury Dept. announced on Mar. 29 that it would start selling its Citigroup stake with Morgan Stanley (MS) serving as sales agent. The government wants to divest its interest in Citi by the end of September 2011. If the selling puts a slow trickle of shares into the market over time via a preset trading plan, that would relieve fears of a discounted, big-block offering and could prompt institutions that have avoided the stock to start buying shares, analyst Jeffrey Harte at Sandler O'Neill & Partners wrote in a Mar. 25 research note.
The trading volume of Citi shares in recent months provides some evidence that the Treasury Dept. could sell its shares without causing much market disruption, Harte said. If Citi's recent average daily trading volume were to hold at about 500 million shares and Treasury shares were to account for roughly 12% of average daily volume, the government would be able to sell the entire stake by the close of its fiscal year ending Sept. 30, 2010, Harte wrote. Since the target completion date is a full year later, government sales are likely to be even less disruptive.
Citigroup received $45 billion from the government through the Troubled Asset Relief Program (TARP), $25 billion of which was converted to the government's 27% ownership stake in the bank. Citi repaid the remaining $20 billion in December with proceeds from a public offering of 5.4 billion common shares in December 2009.
There are encouraging signs that Citi will find it easier to dispose of its noncore assets than the market once thought. The public offering on Mar. 31 of 21.4 million shares of its Primerica (PRI) insurance marketing subsidiary at $15 per share raised $320.4 million, 35.6% more than the $236 million Citi had expected to raise by selling 18 million shares of Primerica at $12 to $14 a share. Even more surprising, Primerica's stock briefly traded above 20 a day later, closing at 19.65 on Apr. 1.
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