Stock of the week: Citigroup stands out as we start the new year
US stock markets including the Dow Jones and the S&P 500 rose to fresh records at the start of this week as the market put new money to work on the first trading day of 2022. Market activity was brisk, the Nasdaq outperformed the other two major US indices, rising more than 1%, boosted by Tesla’s 13.5% jump after record quarterly car deliveries. Momentum is strong in risk assets right now, and history is on your side. According to Bank of America analysts, stocks have risen in the first trading week of January for 11 of the last 13 years, and we expect this to continue as we progress through the week.
Omicron’s mild symptoms leave markets to enjoy the new year
The twin concerns that spooked markets at the end of last year: The Omicron Covid variant and inflation and Fed rate rise fears have not had lasting effects. Even though Omicron case rates are running wild across the world, the medical data so far suggests that this variant is milder and thus, markets have weighed up that the risk this variant poses to economic growth is not of great concern. We believe that with each new wave of Covid, and there will be further waves this year, financial markets are able to get over them faster, and we expect this to continue to happen. Inflation fears and the timing of the first Fed rate hike remains a top priority for traders, however, with most economies open and ready for business there are signs that investors are beginning to see potential US interest rate increases as a good thing as it suggests economic strength. This is the positive backdrop as we start the trading week, and it is the backbone of why we have chosen the current stock of the week.
Why Citi is our pick this week
US banks have been one of our hot sectors for a few months now, as we believe that they will continue to do well in an inflationary environment and when the Fed starts hiking interest rates. The start of the year has seen short-term US Treasury yields surge, the 2-year yield is now 0.77%, the highest level since January 2020, as the market starts to price in the prospect of a Fed rate hike sooner than expected. According to the CME Fedwatch tool, there is now a 61.3% chance of rates to rise from 0-0.25% to 0.25-0.50% at the March meeting, which is only two meetings’ away. This is a huge shift and should support stocks that tend to do well when interest rates are on the up. This is the reason why we like Citigroup. Firstly, it’s a retail bank at heart and will benefit from the rising profit margins from mortgages when rates are rising. We would also note that long-term Treasury yields are also rising, with the 30-year yield back above 2%. Likewise, the US economy has remained open through the latest wave of Covid, which supports economic growth this quarter, a strong economy that is free from Covid disruption is also good news for retail banks like Citi that lend to individuals and businesses.
Another reason why we like Citigroup is because of its fundamentals. It received an upgraded buy rating from Bank of America analysts this week, who have a $100 stock price target on Citigroup, it is currently trading just above $63. Its current share price is well below tangible book value, and it has some compelling businesses that should attract institutional money as we move through January. Its corporate investment bank is another attractive asset, along with its transaction services business, which add to the lustre of owning Citi’s stock in our view.
More reasons to choose Citigroup
Some of you may be worried that you missed the boat, after all Citi’s stock price jumped more than 4% on Monday. However, we are not concerned by this as Citi’s share price is looking like a bargain compared to other US banks, as you can see in the chart below. We not only like Citi because of its compelling businesses that should do well in the current environment, but also because the market tends to favour stocks that have underperformed at the start of a new year. On trading floors, they call this ‘shopping the salvage yard’, and we have seen it in other sectors at the start of this week too, including airlines, cruise operators and casino stocks. The chart below highlights how Citi has underperformed the other major US banks in the past year. In an environment where risk appetite is high, we should see Citi play catch up. We also like when rival banks recommend each other, so the fact that Citi has been upgraded by BOA is another reason to like this stock at the start of the new year!
A word on our 2022 pharma pick
Before we end, we also wanted to update you on one of our picks for 2022, Pfizer. We mentioned that it was poised to continue to do well from its Covid franchise as the pandemic continues to develop in its third year. At the start of this week the pharma sector has underperformed, as the market ditched defensive stocks and went on a risk spending spree. However, after the likes of Moderna and BioNtech fell some 7% and 10% respectively on Monday, Pfizer’s shares were down only 4%, which is a sign that our trade idea for 2022 is currently working, and Pfizer should outperform other pharma stocks this year.
Chart 1:
