Citigroup Inc (C)

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Citigroup Makes Morningstar Financial-Stock List
By: TheStreet | July 8, 2022

• Financial stocks have dropped, with the S&P 500 Financials Sector Index slumping 18% year to date.

The year 2022 hasn’t been kind to financial-services stocks. The S&P 500 Financials Sector Index has slumped 18% year to date.

But as of June 27 the drop left more than 70% of the North American financial stocks that Morningstar covers undervalued. The financial-research and -services firm's analysts determine a fair value for each stock that they cover.

“The median North American financial stock trades at a 21% discount to its fair value estimate compared with a 1% discount at the end of the first quarter of 2022 and a 2% premium at the end of the fourth quarter of 2021,” Michael Wong, director of Morningstar’s equity research for North American financial services, wrote in a commentary.

So now might be a time to consider financial stocks.

To be sure, financial companies still face some headwinds. “For banks, loan chargeoffs should begin to increase, as the buffer in savings that consumers stowed away is spent,” Wong said.

“Banks also had abnormally high mortgage refinancing, underwriting, merger advisory, and trading revenue in 2020 and 2021, and these revenue streams should normalize lower over the next couple of years.”

Meanwhile, with U.S. stocks and bonds slumping, “asset and wealth managers with asset-based fees will report a drop in revenue until the markets recover,” Wong said.

But on the plus side, the Federal Reserve’s interest rate increases “benefit the earnings of many financial companies,” Wong noted.

Here are his top picks for financial stocks.

Citigroup

(C) - Get Citigroup Inc. Report

Morningstar gives the banking giant no moat and puts fair value for the stock at $78, 66% above the recently trade at $47.

“Citigroup is the most undervalued traditional U.S. bank under our coverage and is trading below tangible book value,” Wong said.

“The bank is busy shedding nonperforming segments, refocusing its operations on core competencies and geographies, and dealing with consent orders from regulators. Further, Citigroup is not one of the most rate-sensitive names, which we think contributes to its current lack of popularity.”

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