Reverse Split For Citigroup?

On Tuesday the treasury voted for a measure to reverse split Citigroup’s $C stock.  Treasury said that a reverse split, “will address the fact that the company has a much larger number of shares outstanding than is necessary to ensure adequate trading liquidity.”

Where shall I begin.  Let’s just take a quick look at the Citigroup chart so that you all have some basis for what I’m about to say.

The white line represents the 5 dollar mark and is very close to Citigroup’s current stock price.  The red line represents the treasury’s break even price on their Citigroup investment, around 3.20, as well as a major level of support (not surprising that the we saw support at that price).

Now, why am I talking about a Citigroup reverse split.  To get right to it, the government and Citigroup itself, is trying to position the stock so that it can once again be purchased by mutual funds and other institutional investors.  Now you might ask, why would they need to reverse split the stock for that to happen.  Well, many institutional investors either have hard or soft rules about investing in stocks below a share price of $5.  It just so happens that Citigroup stock trades for about that price right now, which also represents a large level of long term resistance.  As well, the market has come a long way here and financial stocks have seen quite a rally.

Not to get all tin foil hat on you people, but I don’t believe it’s out of the question to think that Citigroup is thinking about how its stock trades here.  Large investors in the company know that if they ever want to get out without killing the stock price by unloading shares, there is going to need to be other institutional investors there to bid for them.  So, in order to make that a reality, Citigroup will reverse split, something like 1 for 4 or 1 for 6, boosting its share price to somewhere between 20 and 30, making it investable for those institutions.

Now, why am I angry about this, because in my mind Citigroup stock is still a pile of garbage on any time frame longer than a few weeks to a few months.  Their balance sheet is till laden with toxic assets up the wazzoo, the bank continues to divest assets, trying to get smaller not bigger, and has lost an immense amount of talent over the past few years.  If institutional investors are not investing in this stock now, they should not be investing in it at a higher share price.  This is going to be just one more way for smart, large, private investors of Citigroup to dump their shares on the public via mutual fund investments.

While the media and some out there in investment land whine about Goldman Sachs selling a CDO made of bad mortgages to an extremely sophisticated and large investor, no one will scream about large investors dumping stock off to mutual funds which represent mom and pop retirement accounts, because hey, it’s Citigroup!

I could be wrong on the fundamentals of Citigroup, and I could be wrong on my feeling about Citigroup’s stock, which I don’t believe will trade for more than $12 at the current share count at any point in time over the next 10 years.  In fact, I doubt it ever trades over 9, and going ever further, it’s unlikely to me that it trades of 5 for any significant amount of time.  I could be wrong about all these things, but I know this, it’s a crying shame that this stock will be passed off on to the public because the treasury decided to let them split their stock price.

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