Citigroup on Verge of Falling Into a Bear Market

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Citigroup Inc.'s (C) stock has fallen by 16% from its January highs and has failed to recover any of those losses. Technical analysis suggests that the stock may drop another 9%. Should that happen, the shares of the bank would enter a bear market down more than 23% from its highs.

The company delivered third-quarter earnings that beat analysts' estimates by 4% despite revenue falling short. It has resulted in analysts cutting full-year 2019 and 2020 revenue estimates for the company. 

C Chart

C data by YCharts


The chart shows that the stock is entrenched in a long-term downtrend after peaking in January. Additionally, the chart shows a newer, short-term downtrend that has formed since mid-September. The short-term downtrend is now acting as technical resistance, and that may cause the stock to continue to trade lower. Another bearish indication is that the stock has filled a technical gap which was created in October. Usually, once a gap is filled, the stock reverts to the previous downtrend. Should the stock continue to move lower as the chart suggests, it is likely to drop to the next level of technical support at $61.50. 

The relative strength index has also been trending lower since January. It suggests that momentum continues to leave the stock.

The weak stock performance stems from estimates for slowing growth. Earnings growth in 2019 is forecast to decelerate to 14%, down from 32% in 2018. Additionally, analysts have lowered their revenue estimate for 2019 and 2020. For example, revenue estimates for 2020 have dropped by almost 1% since the middle of September. 

Despite the stock's steep decline, the shares are still trading at a lofty valuation with a price to tangible book value of 1.09. Since 2010, that valuation has rarely increased over 1, making the stock historically expensive, currently. It too would suggest that shares of Citigroup are likely to continue to drop. 

C Price to Tangible Book Value Chart

C Price to Tangible Book Value data by YCharts

The weaker outlook for the bank can be attributed to a number of factors such as a flattening yield curve and slowing loan growth. The bank will need to see an improvement in one of these factors for the shares to recover some of their losses by year-end. 

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 holdingsInformation 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.

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