Hedge Funds Dumped Citigroup Shares

David Tepper and other top hedge-fund managers pared their former favorites, financial holdings, during the first quarter, damping sector sentiment.


Financial stocks, the best performers of 2009, led the first leg of the bull-market rally, but have since fallen out of favor. They're now more expensive and need to divest profitable proprietary trading units.

Hedge fund managers have released 13F filings, a snapshot of their long positions at the first-quarter's end. The migration out of financials is clear.

On a net basis, financials were still the most widely held sector by hedge funds, comprising 18% of total holdings at the end of the first quarter. But, that proportion dropped from nearly 19% in the fourth quarter, indicating that managers are becoming less bullish on the sector.

Below are the five most widely held hedge-fund stocks or exchange-traded funds of the first quarter, ranked by aggregate position:

$7.8 billion of SPDR Gold Trust

$8.9 billion of Citigroup

$9.1 billion of LyondellBasell

$10 billion of JPMorgan Chase

$13 billion of Apple

The five stocks that received the most hedge fund interest, based on aggregate position increases during the quarter, were Priceline (PCLN), Marathon Oil (MRO), HCA Holdings (HCA), ConocoPhillips (COP) and Nielsen Holdings (NLSN).

The five companies that suffered the most hedge-fund selling were Nike (NKE), Apple (AAPL), General Motors (GM), Potash Corp. (POT) and Citigroup (C).

Financials may suffer further selling because favored companies, such as JPMorgan, disappointed investors with their 2011 guidance in the latest reporting period.

The five financial stocks that were sold in greatest quantity last quarter were Berkshire Hathaway (BRK.A), Charles Schwab (SCHW), SPDR Gold Trust (GLD), Goldman Sachs (GS) and Citigroup (C).

Hedge funds' aggregate position in Citigroup decreased 24% to 202 million shares. Their accumulated stake in Goldman dropped 23% to just under 16 million shares. Other financial stocks that were sold heavily include CIT Group (CIT) and Prudential Financial (PRU).

In addition to Appaloosa, Lee Ainslie's Maverick Capital and Louis Bacon's Moore Capital Management, significantly reduced their stakes in Citigroup during the quarter. However, the selling may be premature.

Signs of a rebound at Citigroup were manifest in its latest quarterly report. The bank's adjusted first-quarter earnings per share dropped 29% to $1, but exceeded analysts' consensus earnings forecast by 10%.

Revenue, down 22%, missed consensus by 4%, but the shares stagnated in response to the report. Citigroup is still whittling down to core operations, selling assets from Citi Holdings, its "bad bank" counterpart. As hedge funds sour on the Citigroup story, it's wise to watch the stock for pullbacks.

JPMorgan, which has an "overweight" ranking on Citigroup and the highest price target on Wall Street, at $65, was encouraged by first-quarter results. The New York-based bank noted that "strong growth in tangible book value and capital return prospects improved with the sale of sizable securities with very punitive risk weightings under Basel III."

Citigroup completed a 10-to-1 reverse split on May 9, bringing its share price above $40. It also recently reinstated its quarterly dividend, but at one cent per share, the annualized yield is a paltry 0.1%.

JPMorgan believes that Citigroup's credit outlook is improving, but was disappointed by lower investment banking and transaction processing fees during the latest quarter. These two trends contributed to poor revenue and net-interest-margin compression. Still, Citi Holdings decreased to $337 billion, or just 17% of total assets.

Going further, JPMorgan sees declining net credit losses, going forward, while cautioning that mortgage losses may be "sticky near-term." International credit losses may also increase as that is now the bank's critical loan growth venue.

Capital levels continue to improve and Citigroup's good-bank, bad-bank strategy has helped it shed legacy assets faster than bloated peer Bank of America (BAC) and focus on emerging markets, where Citigroup already has a foothold.

Based on JPMorgan's measurement, Citigroup is trading at 0.9-times tangible book value and 8.1-times the bank's 2012 earnings projection, both metrics reflecting sizable peer discounts. JPMorgan feels that Citigroup is still attractive due to "strong capital levels, sizable amount of loan loss reserves and potential for faster growth from emerging markets."


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