Kevin Holt calls himself a “contrarian, deep-value investor.” The more people hate a stock, he says, “the more we buy it.” That sensibility has propelled the $12 billion Comstock Fund, which Holt, 46, has led or helped lead for 15 years (Invesco bought it from Morgan Stanley in 2010) to a 7.3% annualized return, vs. 4.1% for the S&P 500. “Much-hated” aptly describes shares of Citigroup, which nearly crashed during the financial crisis before beginning a slow turnaround. Holt thinks the shares are worth nearly twice today’s price, and he’s been buying since 2009, making Citi his fund’s top holding.
1. The stock is undervalued
When Holt began buying Citi shares in late 2009, the company was so tarnished that the stock traded for little more than half the value of Citi’s tangible assets. That ratio of price to tangible book value has stepped up from 0.6 to 0.8 today. Despite that improvement, Citi still trades at a significant discount to rivals Bank of America (1.2) and J.P. Morgan Chase (1.4). As Citi continues to address its problems (see item 2) and the stain of its past stumbles is erased over a period of years, Holt thinks the company will be able to achieve a ratio in line with its peers’.
2. Citi is fixing its mess
Citi’s crucial return on equity (ROE) is still being dragged down by bad mortgages. The process of ridding itself of those mortgages could take up to six more years, according to Holt. Once that occurs, he believes Citi’s ROE will improve from its current 13% to around 15%. Banks with ROE at that level typically trade for about 1.5 times tangible book value, according to Holt. Potential icing on the cake: Profits for all banks, including Citi, should increase when interest rates rise and banks can loan money at higher rates.
3. Ignore the Fed spat
Holt thinks the Federal Reserve’s recent refusal to sign off on Citi’s capital plan is a problem of diplomacy and patience, not of inadequate cash. As it stands, Citi’s “tier 1” capital ratio is 10.4%, well above the 9% minimum for banks of its size. The diplomatic challenge won’t be solved quickly, but eventually it will. Meanwhile, according to Holt, Citi is on track to generate $75 billion in profits over the next three years. He believes that once Citi has ironed out its problems with the Fed, it can begin a multiyear share-repurchase plan that could acquire as much as half of the company’s shares.
4. Heading for $80 a share?
Citi bears view the stock too much through the lens of the company’s darkest moments, Holt contends. It’s true that, at a recent $48, the shares have doubled from their lows. But he notes they once traded at a split-adjusted $500 a share. “If you do the fundamental analysis,” he says, “Citi isn’t going back to the top because it’s now regulated” more like a utility company than the freewheeling trading house that giant banks used to be. “It isn’t going to do sexy stuff because the government won’t let it,” he says. “But that doesn’t mean that Citi can’t go back to $80 or $90 a share.”
This story is from the May 19, 2014 issue of Coins2Day .