Citigroup: Time to Double Down

Citigroup (C) is already attractively priced and investors are looking at several short-term events that could drive the shares even lower, setting up a beautiful opportunity to build on long positions.

On the heels of Bank of America's (BAC) first-quarter earnings, where the company missed analysts' expectations and also announced a settlement of mortgage buyback claims with Assured Guaranty (AGO), Citigroup is set to announce earnings Monday, and could also announce a settlement of Securities and Exchange Commission fraud allegations as early as next week.

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According to a Wall Street Journal report, Citigroup, along with Morgan Stanley (MS), Bank of America, JPMorgan Chase (JPM), and UBS (UBS) are being probed by the SEC, and rather than coming up with a global settlement, the regulator is looking to settle individually with the companies, because of differences in the allegations they face, according to unnamed sources.

Another coming event that is expected to initially put downward pressure on the shares is a 10-to-1reverse split that will take place after the market close on May 6, with any fractional shares being automatically sold.

The reverse split is probably a good thing, as some institutional investors who -- sometimes foolishly -- steer clear of stocks priced under $5 may now consider the shares, but stocks typically see short-term declines after a reverse split.

Another unfolding event for Citi, which derives about 60% of revenues from business outside the United States, is the Indonesian government's ban on the company's efforts to sell wealth management services after an employee was accused of stealing from clients. This was termed a very negative development by Rochdale Securities analyst Richard Bove, and Bloomberg reported on Thursday that the wife of another Indonesian client whose husband had died after being questioned by Citigroup debt collectors, was suing the company for roughly $347 million.

So there's plenty of headline risk for Citigroup, which means day traders can make a killing with short-term trades if they guess correctly, but for long-term investors, the eventful weeks ahead present an opportunity to build positions in the company's shares, to set up growth for the years ahead.

Citigroup's shares are priced very cheaply based on analysts' earnings estimates. The company's forward price-to-earnings ratio was 8.7, based on Thursday's closing price of $4.43 and the consensus 2012 earnings estimate of 52 cents a share, among analysts polled by FactSet.

The remaining "big four" US banks are priced even lower based on forward price-to-earnings ratios, with Bank of America the cheapest, trading for just 7.4 times the 2012 consensus EPS estimate of $1.79, at Thursday's closing price of $13.13.

For JPMorgan -- widely considered the "gold standard" among the big four, the forward P/E was 8.2, based on Thursday's closing price of $44.97 and the 2012 consensus earnings estimate of $5.2 a share. Wells Fargo's (WFC) forward P/E was 8.5, based on Thursday's closing price of $30.15 and a consensus 2012 EPS estimate of $3.59.

So why pick Citi from among the big four?

For one thing, with differing business models, all of the big four have their attractions. For Citigroup, a focus on international business is a major plus, irrespective of the Indonesian hiccup.

Sterne Agee analyst Todd Hageman initiated his firm's coverage of Citigroup on April 8 with a buy rating and $6 price target, saying that "while world GDP is forecasted to grow 5% annually through 2030, emerging markets comprise 50% of global GDP" and are expected to show a compound annual growth rate "at about 10%." The analyst added that Citi "has a presence in about 80% of the top 150 GDP markets," making it unique among US banks.

CEO Vikram Pandit's good bank/bad bank strategy of placing problem assets and non-core businesses in Citi Holdings and running them off, has improved "capital flexibility with the steady reduction in non-core assets and re-allocation of capital towards higher return, better growth businesses."

The company's capital strength is likely to continue being boosted over the next several quarters as the release of loan loss reserves continues to boost earnings and flow into Tier 1 capital. According to regulatory data provided by SNL Financial, Citigroup's loan loss reserves covered 6.16% of total loans as of December 31, while the annualized ratio of net charge-offs (loan losses) to average loans in the fourth quarter was 4.24%, and is expected to continue to decline as credit quality improves.

Out of 20 analysts covering Citigroup, 11 have buy ratings, seven are neutral on the shares and two recommend selling. Keep in mind that sell-side analyst recommendations and price targets are usually based on 12-month investment horizons.

Bank stock investors holding the largest industry names have certainly needed a lot of patience over the past year as all of the big four pulled back, but based on previous economic cycles, long-term investors with horizons going out several years are looking at a generational opportunity to build positions now, hold and reap.