Following billionaire investors can be a good idea. Many of these investors run large funds that manage billions in capital. They also have a lot of experience and professional training, and have been through plenty of market cycles.
I would never recommend investing blindly without due diligence because large hedge funds invest over different time horizons than most retail investors and with distinct goals. Still, retail investors can use the quarterly filings of hedge funds and asset managers, accessible through the Securities and Exchange Commission (SEC), to get new investment ideas and to check their thesis if they own one of the same holdings.
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Recently, billionaire Stanley Druckenmiller piled into a high-yield stock trading for 82 cents on the dollar, which Warren Buffett also owns. Let's take a look.
Bank stocks may not be as exciting as the tech and artificial intelligence (AI) crowd, but investors can make money in any sector if they buy companies that can improve their earnings power at the right price. Citigroup (NYSE: C) fits this mold. The stock has struggled since the Great Recession, and the market left it for dead.
However, in recent years the bank has started to get its act together under the leadership of CEO Jane Fraser. Billionaires are buying in:
Buffett and Druckenmiller's positions say different things, to my mind. Berkshire has soured on the bank sector since COVID-19, selling many of its large bank holdings. I also find it interesting that in the 21st Century, Berkshire has owned almost every large U.S. bank. However, it hasn't owned Citigroup since 2001, according to SEC documents.
Druckenmiller, on the other hand, bought many bank stocks in the third quarter, which seems to suggest he is bullish on the sector.
Citigroup trades at roughly 82% of its tangible book value (TBV) or net worth. Now, there is a reason the large bank trades at a discount. Since the fallout of the Great Recession, Citigroup has struggled to get back on its feet. The bank for years has produced lackluster returns due to its inefficient, sprawling organization that many investors simply gave up on after many years of underperformance.
So, why is this time different? Fraser took the reins of Citigroup at the beginning of 2021 and wasted no time making big changes. Citigroup has since been in the process of selling or exiting 14 international consumer franchises that consumed too much capital and didn't have the scale to compete in their respective markets. Citigroup also announced it would divest its franchise in Mexico, which has been highly profitable.
However, investors were optimistic that management could take the billions of capital allocated to the international franchises and make prudent investments, such as modernizing the company's infrastructure and investing in higher-performing businesses.
Investors also believed Citigroup could use capital to repurchase shares while the stock traded below TBV. The bank has begun to do this, and any repurchases at these levels will be accretive to TBV. Considering that most banks trade relative to their TBV, a growing TBV usually benefits a bank's stock price over time.
The divestiture of Citigroup's Mexico division has taken longer than expected because it's such a critical bank in the country. Recently, Citigroup split its Mexico institutional banking business, which it plans to retain, from the consumer and small- and middle-market banking business for which it eventually plans to conduct an initial public offering.
Analysts are now more optimistic about earnings improvement, as the company focuses on its higher-returning businesses in credit card lending, investment banking, and international cash management and money movement services.
Citigroup also has a 3% dividend yield, so investors are compensated to wait. I also think the environment for banking has improved dramatically. The yield curve is steepening; the incoming Trump administration will likely bring de-regulation and lighter capital requirements; and investment banking activity is expected to improve.
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Citigroup is an advertising partner of Motley Fool Money. Bram Berkowitz has positions in Citigroup. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.