(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Citigroup Inc. (C) is off to a horrible 2018, with the stock down by nearly 12%, trailing the S&P 500's rise of 2%. But the outlook for Citigroup may be about to get even worse, with the potential for stock dropping by another 8%, based on technical analysis.
Driving the bearish outlook for the stock is its slowing earnings growth outlook. Additionally, the bank's valuation is still high despite the steep stock decline in 2018. A flattening yield curve may be an additional worry for investors on the horizon.
Weak Technical Pattern
Shares of Citigroup have been trending lower since the stock peaked in mid-January. The stock attempted and failed to rise above that downtrend in the middle of May. As a result, the stock has returned to the downtrend and has recently fallen below the critical support level around $66, and a long-term uptrend which started in July of 2016. With two levels of support broken, the next level of technical support comes around $61.10, a drop of about 8% from its current price of $66.40. (For more, see also: Buy Stocks on Big Sell-Offs, Says Citigroup.)
The relative strength index (RSI) has also been weak and trending lower since peaking at overbought levels of 75 in early January. The current RSI level sits around 40. The RSI would need to fall below 30 for it to reach oversold levels.
Weakening Growth Outlook
The outlook for the business is perhaps the reason for the bearish technical patterns in the chart, with earnings growth expected to slow significantly next year. In 2018, analysts are forecasting earnings growth of about 29%, but that growth is forecast to drop to only 14% in 2019. Meanwhile, revenue is seen rising by about 4% in both 2018 and 2019.
Additionally, the bank's current price to tangible book value is trading at the upper end of its historical valuation since 2012, at 1.09. Before the middle of 2017, the bank never traded above 1 over the same period.
C Price to Tangible Book Value data by YCharts
Another headwind not only facing Citigroup but all the banks is the flattening yield curve. The spread on the 10-year U.S. Treasury rate and the 2-year U.S. Treasury is just 34 basis points; it is the lowest level since 2007. The flattening curve reduces the spread between what it costs banks to borrow money over the short term, and what they can lend money at over the long term. (For more, see also: Citigroup Stock Could Hit Triple Digits in 2018.)
10-2 Year Treasury Yield Spread data by YCharts
The current setup in the technical chart seems to reflect an outlook for the bank that appears to weaken. Shares may continue to struggle until the middle of July when the bank is next expected to report quarterly results.
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.