Warren Buffett bought Citigroup for about $2.5 billion. If you’re looking for a low-risk approach to ‘buy the dip’, this big bank bet is worth copying.
The Oracle of Omaha has had a busy neighborhood.
According to his latest 13F filing, Warren Buffett put about a third of his money into new investments in the year’s first three months.
As always, Buffett’s biggest swings are remarkable. His decision to sell most banking stocks while adding Citigroup (C) to Berkshire Hathaway’s (BRK) portfolio confuses Wall Street.
This is why this contradiction has attracted so much attention.
Buffett loves banks
Buffett is very familiar with banking and financial services. He believes the business is relatively simple and lucrative if managed properly.
“If you can just stay away from the fads and make a lot of bad loans, banking has been a remarkably good thing in this country,” he told Berkshire Hathaway investors in 203.
What about the 2008 global financial crisis? Buffett went shopping at the time, taking up interests in JP Morgan (JPM) and Goldman Sachs (GS).
Major banks have been the Berkshire portfolio’s largest holdings for several years. In fact, in 2009, he said Wells Fargo (WFC) was his most confident investment.
“If I had to put all my assets in one stock, it would be the stock,” he told Berkshire shareholders.
Catch Buffett on the Rebound
This year, Buffett has completely abandoned all of these investments. Only a few banks remain in the portfolio.
That doesn’t mean the love affair with financial services is over.
Buffett even added a new sofa to his collection this year: Citigroup. During the first quarter of 2022, he said 55 million shares of Citigroup to the Berkshire portfolio.
The stake is now worth $2.5 billion, making it the 16th largest holding in the basket.
The bet appears to be based on a turnaround.
The transformation of Citigroup
Citigroup has lagged behind its competitors. The stock has fallen more than 28% in the past five years.
Compare that to Bank of America’s 33% return over the same period. Even the SPDR S&P Bank ETF (KBE) is up 3%.
The company is now trying to catch up on a turnaround. Last year, the board of directors of Citigroup named Jane Fraser as its new CEO, making her the first female leader of a major US bank.
Fraser’s strategy is to focus on the more profitable segments of the company. Citigroup sells or closes operations in Mexico, Australia, the Philippines, South Korea, and elsewhere.
Citi stocks have not fully reflected this new strategy.
An undervalued opportunity?
Citigroup shares are currently trading at a price-to-earnings ratio of 5.5. The price-book ratio is 0.5. That’s significantly lower than the industry average of 9.5 and 1.1, respectively.
Simply put, the stock is cheap.
If the new management team can streamline operations and increase profitability, the bank’s valuation can overtake its competitors.
Meanwhile, a rising interest rate environment should provide fresh air.
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