One of the most visible bank analysts is out with a bold prediction. Mike Mayo, who recently joined Wells Fargo (NYSE: WFC) from CLSA Americas, predicts that shares of Citigroup (NYSE: C) could double in four to five years.
It's a bold call. And it could happen. But is it reasonable for investors to expect it to?
Continue Reading Below
Mayo's logic is twofold.
In the first case, he sees Citigroup's profitability improving meaningfully over the next few years.
Its return on average common equity over the past six quarters has fluctuated between 6.2% and 7.4%. Mayo sees this climbing to about 9% in 2019, and then to 11% in 2021.
On top of this, Mayo sees the bank buying back as much as a third of its outstanding common stock over the next five years.
That equates to about 8.5% of its current market cap. If you multiply that by five, you get 43%, or a little more than the third predicted by Mayo.
This is a bold call by Mayo because it's complete guesswork. Trying to predict Citigroup's profitability next year is all but impossible. Doing so five years would require a magic eight ball to even get in the ballpark.
And the same is true for buybacks. There's no telling what the economy will do between now and then, which would impact share repurchases. There's also no telling what Citigroup's valuation will do between now and then, which would impact their efficacy.
This is the single most complicated bank in the United States.
It's nothing like Wells Fargo, for example, a conventional domestic lender with a much more predictable stream of revenue from its massive loan portfolio.
As a universal bank, Citigroup not only has substantial Wall Street operations, which yield a notoriously volatile revenue stream, but its entire business model is predicated on serving as a global bank with operations and exposure that reach around the world.
To put all of this in perspective, when I think and talk about the nation's biggest banks -- those like JPMorgan Chase, Bank of America, and Wells Fargo -- I don't even include Citigroup in the discussion.
It's just too unique.
On top of this, or perhaps as a result of it, Citigroup has almost invariably found itself smack dab in the middle of every major financial crisis since and including the Great Depression.
Its actions in the 1920s were the primary impetus for the Glass-Steagall Act of 1933, separating investment and commercial banking operations. It came within a hair's breadth of failure during the less-developed loans crisis of the 1980s and 1990s. And, of course, it wouldn't have survived the financial crisis but for multiple bailouts from the federal government.
The point being: While Citigroup is an incredibly important financial institution, and one of our oldest, it's silly for anyone that knows anything about banks to go out on a limb and proclaim that its stock will double in four to five years.
It makes for good headlines, but isn't grounded in reality.
10 stocks we like better than CitigroupWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Citigroup wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 1, 2017