(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Citigroup Inc.'s (C) stock has fallen about 11% off its highs this year amid growing concerns about the outlook for America's biggest banks. That may be just the beginning. According to a technical analysis, the bank's shares may plunge an additional 10% from their current price of around $73. Such a drop would push down the stock 18% off its 2018 intraday high in January.
A key force weighing on Citigroup's stock is its deteriorating revenue outlook. Analysts are reducing their revenue forecasts for the balance of 2018 and beyond, despite improving earnings. (See: Big Banks Get Sold After Earnings.)
Weak Technical Chart
The technical chart for Citigroup has been trending lower since peaking in January. Additionally, the stock has been unable to rise above roughly $73 since the beginning of May, a level of technical resistance. The stock has failed to rise above $73 three times, creating a bearish technical reversal pattern known as a triple top. That suggests that Citigroup's stock will fall in the coming weeks. Should that happen, the next level of significant technical support is $65.90.
The relative strength index (RSI) also is trending lower since peaking at overbought levels well above 70 in October of 2017. The bearish trend for the RSI continues, suggesting the shares will fall. Volume levels have also been weak recently and well below the 3-month moving average. It suggests there is not much conviction among buyers.
One reason for the bearish technical chart is the lower revenue estimates. Revenue forecasts for 2018 have declined to $74.0 billion from prior estimates of $74.3 billion. Meanwhile, estimates for 2019 and 2020 have fallen, too.
Analysts' strong earnings estimates for Citigroup may be deceptive because they are partly fueled by major stock buybacks. The company announced a $22 billion plan at the end of June, of which $17.2 billion is in stock. Analysts have increased their earnings estimates for 2018 by 1.5% to $6.57 per share, up from prior forecasts of $6.47. (See: Citigroup's Stock May Rise 10% on Earnings Growth.)
This very mixed picture is why Citigroup's stock is likely to continue struggling. Investors may not get full clarity on its businesses until the bank reports results in October.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.