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Stock Strategist

Why We're Bullish on Citigroup

Citi is bloody but unbowed, and we think the credit fears are overblown.

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As part of our series on the credit crisis, we're taking a deep dive into  Citigroup (C). The stock is one of our highest-conviction picks. We think the upside is huge (about 75% at today's prices) and the downside is limited. In order to justify the current stock price, Citi would have to suffer unprecedented dilution--to the tune of another 4 billion shares outstanding. We think there is no more than a 5% chance of this happening, meaning we believe the odds are squarely in favor of investors at today's prices.

At $30 a share, the market seems to be demanding a 15% annual return from now to eternity to hold Citigroup's shares. These are the kinds of returns that investors expect from speculative investments such as one-product biotechnology companies or emerging-markets firms. We'd gladly accept that kind of return from a financial bellwether like Citigroup. At some point in the future, when all the fuss has died down, the market will reduce the risk premium it demands to hold Citi's stock, at which point we expect the stock to approach our fair value estimate of $53 per share. Investors with a long-term horizon should take advantage of the market's current fear to invest in Citigroup's shares.

Ganesh Rathnam does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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