It's the lightning round, so you can't wax all that philosophic, but you could read the answer on my face: total dismay and a wish that I didn't really have it in the portfolio and didn't want to have to justify the stock. Except that the "book," the book that we were all taught to understand through years and years of training, says that if you believe that the book value is scrubbed clean, if you believe that, in truth, there is that much cash on hand, then you would be NUTS to sell it because you will eventually be rewarded with a higher price.
Or to put it another way, it simply isn't logical to sell. Emotionally, it isn't logical to own; and logically, it should be owned unemotionally.
Now Citigroup is particularly inexpensive, trading at about a three dollar discount to the price it would be if they just closed the doors. The problem, of course, is that they aren't going to close the doors and the market is implying either that they are going to lose the money or that it isn't there to begin with.
The company has pledged to buy back about 8% of the company at these levels, because it is advantageous to shareholders. I would argue it is not as advantageous as a dividend that would give us a 4% yield. I know the longer Citi stays here, the more catcalls there are about Michael Corbat's leadership. But I think we can stipulate that these stocks are all pretty awful -- and that my alma mater, Goldman Sachs (GS) is even worse when it comes to both price-to-earnings multiple and discount to book.
But let's de-personalize it for a second. Let's consider the case of KeyCorp (KEY) . First, Key sells at the exact same multiple to earnings as Citigroup. Second, it has a much better -- and safer -- yield of 4.41%. Third, unlike Citi, it can be taken over, which is probably why it trades at $3 over book. Fourth, it would be an amazing franchise for someone to buy because it has 1200 branches in 25 states, is extremely profitable and is growing at a pretty decent clip.
Yet no bank has shown any willingness to buy it and the big funds clearly are steering clear.
It's a total anomaly.
Now, of course the prevailing wisdom is that you can't own the banks if the yield curve is inverted, because there will be a tremendous amount of stress if we have the recession the curve says we will have. That includes both Key and Citi. There's also a reasonable belief that there will be no regulatory relief about how much capital can be returned to shareholders if things get dicey.
But the simple fact is that there is a total lack of catalyst beyond the Fed cutting rates several times -- and I don't see that happening.
So what's the end result?
Simple: stagnation, which is simply unacceptable to most portfolio managers.
They do show this, though: This market is a complete repudiation of the concept of value. There has been a predilection for growth in my whole of 39 years picking stocks, but I have never seen such a damning of an entire class of equities that are actually solved and making a lot of money.
Sometimes I think maybe it is a failure of imagination, but I can't think about what could occur that will make these stocks gain in price -- other than, as Karen Cramer would say, something that will happen right after we kick them out.
And maybe, just maybe, that's the irrationality that keeps them on the sheets from now, hopefully to less than kingdom come.
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