Fortune magazine reports that fund manager Bruce Berkowitz has bought more than US$700-million of Citigroup shares. Berkowitz, who manages the Fairholme fund and was named Morningstar’s U.S. fund manager of the past decade, told Fortune he thinks the bank is cheap. It trades for less than its tangible book value. And the U.S. Treasury department has allowed Citi to repay its Troubled Asset Relief Program funds, which Berkowitz argues is an indication that regulators must think the bank has adequately recapitalized itself.
Before following Berkowitz’s lead, you should look at the bank’s income statements and cash flow statements for the past few quarters. The bank is losing money and cash flow from operations has turned hugely negative—to the tune of minus US$56 billion over 2009. Berkowitz is betting that the bank’s profits will revert to something like past glories, but that’s by no means certain. A turnaround could be a long time coming.
The strongest argument for an investment in Citi is that the U.S. government has demonstrated that it will not let the bank fail, no matter what. At its current valuations, and with the buffer of an implicit government guarantee behind it, Citi is worth a look for long-term investors—but only if you can handle some serious volatility.
Freelance business journalist Ian McGugan blogs for the Financial Post.