2 Billionaires Buy This Former Out-Of-Favor Bank, Why?

As recently as 2020, few analysts could have predicted that Stanley Druckenmiller, a billionaire who used to manage Quantum Fund with George Soros, would invest in Citigroup, a multinational banking company with a reputation for mismanaging funds and contributing to the Great Recession.

Despite those facts, Druckenmiller’s firm, Duquesne Family Office, bought more than 327,000 shares in Citigroup last quarter. Does this mean the company has finally turned itself around? And what does Druckenmiller’s decision mean for more modest investors?

Let’s take a closer look at Citigroup to see why it has attracted Druckenmiller’s attention.

Key Points

• CEO Jane Fraser’s reforms, including remote work and branch divestments, have strengthened Citigroup’s appeal to top investors like Stanley Druckenmiller.
• Citigroup’s shares trade at an 18% discount to fair value, with a 3% dividend yield, making it an attractive investment opportunity.
• Future deregulation could boost profits, though risks from past industry disruptions remain a concern.

A New CEO Has Put Citigroup on a Better Path

As the Great Recession started pummeling markets in 2007, Citigroup found itself near the center of the economic chaos. Not surprisingly, Citigroup’s CEO, Charles Own Prince III, retired under pressure. Several people have held the position since then, but some would argue that none have been able to put investors at sufficient ease. In fact, the company suffered allegations after allegations under multiple CEOs.

That streak of bad luck seems to have ended in 2021 when Citigroup promoted Jane Fraser to the seat. Fraser immediately took a different approach to management. Unlike other banking CEOs, she embraced remote work during the pandemic, helping Citigroup attract top talent away from rivals like Goldman Sachs.

Under Fraser’s guidance, Citigroup has also divested itself of several international branches. In many cases, the company has been able to sell its assets to regional competitors. In other cases, the sales have come at an expense. For example, Citigroup has put in an enormous effort in divesting itself of its Mexican branches because it plays such a critical role in the Mexican economy. Still, these moves have put Citigroup on a better path that apparently makes it look more appealing to Duquesne and other high-profile investors.

Potential Deregulation Could Mean Higher Profits in the Banking Sector

Duquesne Family Office might also see strong potential in Citibank as Donald Trump returns to the White House. During his first administration, President Trump rolled back banking regulations. Trump, who largely stands against federal regulations, could make it easier for Citigroup and other large banks to generate profits.

He has even said he would work toward integrating cryptocurrencies into the mainstream economy, which might create opportunities for banks willing to take such a risk.

There are some concerns about the effects of deregulating the banking industry, though. After all, deregulation largely made it possible for lenders to upend the global economy in 2007.

Some opponents have argued that the Trump administration’s previous rollbacks made possible the collapse of First Citizens BancShares, a division of Silicon Valley Bank in 2023. The consensus broadly is that the bank did make several risky investments, leading to inadequate liquidity according to the Federal Deposit Insurance Corporation, or FDIC.

Although SVB was the largest Silicon Valley bank by deposits, a run on deposits made it impossible for the bank to serve customers.

Later, First Republic Bank was closed and sold to JPMorgan Chase. Cautious investors might look at these events, foresee future industry disruptions, and choose to ignore the banking industry until a Republican-led federal government can prove itself successful.

Still, it’s worth noting that Berkshire Hathaway currently has a $4 billion investment in Citigroup. Warren Buffett’s company is known for taking a long-term, conservative approach to investing. It’s also worth mentioning that Berkshire Hathaway sold all of its Citigroup shares in 2001, which either shows exceptional foresight or terrific luck. It only started buying shares again in 2022.

Why Is Stanley Druckenmiller Buying Citigroup?

Citigroup’s tangible book value appears to be compelling now, trading at an 18% discount to fair value, which is likely a prime reason why Stanley Druckenmiller bought shares.

Maybe Citigroup’s history and potential regulatory changes have had little influence on investors like Druckenmiller. Perhaps they’re just looking at recent numbers, and they like what they see.

The company’s tangible book value looks particularly attractive. At Citigroup’s current net worth, shares cost about $0.82 on the dollar. Depending on how the company’s stock performs over the next few months, we could see those numbers get much closer together. In other words, Druckenmiller might consider now the best time to purchase shares at a discount. If more investors buy shares and push the price up, he would lose that discount and risk maximizing his profits.

Citigroup’s 3% dividend yield adds to this appeal. While 3% isn’t outstanding for the financial sector, it does place Citigroup above most companies on the S&P 500. If it can maintain a 0.5% lead, large investors stand to make more money quickly by choosing Citigroup over its competitors. Druckenmiller could later decide whether to take dividends as cash payments or reinvest them to purchase more shares. Either way, Citigroup has a slight advantage over most companies in this sector.

Should You Invest in Citigroup?

Hedge fund managers have complicated reasons for making their investment decisions so it’s hard to peel back the layers entirely and know precisely the reason why Buffett and Druckenmiller have taken such large stakes but what we do know is the majority of analysts look upon Citigroup approvingly. Our research shows that Citigroup has nine Buy ratings; five Hold ratings; and zero Sell ratings.

According to the consensus of these analysts, investors with an existing stake in Citigroup shares should hold them and reevaluate their investments after the next quarter. If you’re looking to add shares to your portfolio, most analysts would recommend picking Citigroup. None think that you should sell your shares to avoid emerging pitfalls.

The current trading price will likely influence your decision. Over the last 52 weeks, the price has varied from $50.51 to $74.29. A discounted cash flow forecast analysis shows 16.3% upside to fair value of $91 per share though analysts consensus is slightly more muted at $87 per share.

How the company performs will largely depend on Jane Fraser’s leadership. After all, the company could refrain from engaging in risky behaviors even if the federal government makes those activities legal. Citigroup could also take advantage of regulatory rollbacks while weighing the pros and cons of risk. There’s plenty of opportunity, but success will depend on taking a wise approach.