(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Traders are betting shares of Citigroup Inc. (C) will continue declining after the company reports first-quarter 2018 earnings on April 13. Options traders are looking for shares of Citigroup to slide by nearly 6.25% by options expiration on April 20. A technical analysis suggests that shares of Citigroup could fall even further, perhaps as much as 7.75%. (For related reading, see also: Citigroup's Stock Is Cheap for a Good Reason.)
Shares of Citigroup are down almost over 8% on the year, underperforming peers such as JP Morgan Chase & Co. (JPM) and Bank of America Corp. (BAC). Citigroup is expected to report that first-quarter earnings climbed by 28%, while revenue is seen rising by just 4%. It could be one of the reasons why traders are bearish on shares of Citigroup going into the results, because despite the appearance of healthy growth they are not nearly as strong as peers such as JP Morgan.
Bearish Options Bets
The $65 strike price options set to expire on April 20 for Citigroup have nearly 19,000 open put contracts. The open interest on those options rose sharply at the end of March, and are currently trading at a price of $0.60 per contract. For a buyer of those puts to make a profit, the value of the stock would need to fall to about $64.40, a drop of about 6.25% from its price of approximately $68.70 on April 6.
Weak Stock Chart
The technical chart for Citigroup also shows how the stock is in the middle of a vicious downtrend, with $66 currently serving a critical technical support level. A breach of that support level could send shares as low as $63.25, a drop of 7.75%.
Some of the bearishness may stem from a lack of strong revenue growth for Citigroup. The first quarter results are seen rising by only 4%, to $18.84 billion, while earnings are expected to climb by 28% to $1.62 per share. Compare that to JP Morgan which is expected to grow revenue by 11.85% to $27.60 billion, and earnings to climb by over 38% to $2.28 per share. (For more, see also: Goldman, Citigroup Face Rocky Earnings Season.)
The outlook for Citigroup doesn't get much better when looking at the annual growth rates, with analysts looking for revenue to rise by 3.6%, while earnings are expected to grow by nearly 27%. JPM forecasts show revenue increasing by 8.3%, and profits climbing by 29.5%. It could help to explain why JP Morgan has outperformed Citigroup by such a large margin in 2018.
It seems the bearish bets on Citigroup may come with a good reason, now investors and traders will have to wait and see if Citigroup results come in better or worse than expected.
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.