There are some stocks that just can’t be worth $1 (or some number around this). These stocks either goes to zero or it goes well above zero.
I’m going to use Citigroup as my case-in-point and then extend the argument to Bank of America.
Citigroup’s stock reached a low of $1.02. Now, at the current $2.62 a share, Citi has a market capitalization of $14.24 Billion. I’m not going to show you a million numbers, but I will mention that Citigroup has $644 Billion in cash (courtesy of Yahoo! Finance). This means that the total value of Citigroup, as measured by market capitalization, is a fraction of its cash holdings.
I know. All the “toxic” assets that Citigroup holds and a high default rate on its loans could make it insolvent, right? Sure. But my thing is that even if Citi is insolvent, it will not fail. As we all know by now, Citigroup falls in that “too big to fail” category.
This means that the downside of Citigroup is protected by the government and it has all this cash and many more billions in assets. Therefore, if Citi is not going to go bankrupt because of insolvency and wipe out the stockholders (Go to ZERO), then it is going higher because Citigroup is not a $1 stock. All in all, this is a binary event.
So, if you’re willing to take some pain in the short-run, Citigroup stock may be a good long-term stock that could give you great returns. Imagine if you buy it at $2.50 and then have it go anywhere from $10-20 in the next six months? Not bad. I think it has the potential to do so because Citigroup is just not worth $1-$3.
Before I move on to B of A, I must say that you are assuming some default risk when buying Citigroup. I know the government says it would not let Citigroup fail, but hey, you never know because nothing is guaranteed.
Now, for Bank of America. Same concept. This is the biggest commercial bank in the United States. There is no way in hell that the government or anyone else would want this bank to fail or default on its obligations. Therefore, at the moment, B of A’s bankruptcy/default risk due to its bad decisions with “toxic” assets is minimal.
So you have this big, typically profitable bank trading at less than $7. That is just not going to last. Due to the current economic turmoil, the stock may still go lower, but it is almost guaranteed that it will trade somewhere in the $20s (at least) in the intermediate to long term. Once again, you could get a return exceeding 100% if you are willing to take some risk and hold this stock for some period of time.
In sum, you have some binary possibilities with these stocks that are getting killed. They are either going to ZERO and the company is going bankrupt or they are going much higher. It’s a lose everything or win a lot situation. Now, it’s your investment, your risk appetite, and your decision.
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