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Four Reasons to Buy Citigroup Inc (C) and Sell JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc (GS)

‘Rotation’ is a commonly-used term among investment professionals, and one that may draw your attention in the quest for stock market success.

Citigroup Inc (NYSE:C)

In the world of stocks, rotation often takes place between market sectors. For example, investors often rotate away from consumer staples such as Dollar General Corp. (NYSE:DG) in favor of consumer discretionary stocks such as NIKE, Inc. (NYSE:NKE) in a recovering economy.

Rotation can also take place within a sector.

In the wake of the 2008-09 credit crisis, financials outperformed the S&P 500 index by a wide margin as the Federal Reserve laid the groundwork for a banking recovery.

Citigroup Inc (NYSE:C) participated in the market rally, but in my opinion the bank could outperform its financial peers in the coming months.

The third largest bank by deposits, Citigroup Inc (NYSE:C) has earned a new level of attention with the resignation of longtime CEO Vikram Pandit and with Michael Corbat’s succession. The stock has outperformed so far in 2013 with a 21.7% gain compared to only 13.1% for the S&P 500. The bank has also posted a larger YTD return than Wall Street competitors JPMorgan Chase & Co. (NYSE:JPM) and Goldman Sachs Group Inc (NYSE:GS).

Here are four reasons why readers should rotate into Citigroup Inc (NYSE:C) for the second half of 2013:

  • On July 1, Citigroup Inc (NYSE:C) announced a formal settlement of $968 million with FANNIE MAE PFD S (OTCBB:FNMAS) to resolve mortgage repurchase claims, removing a large overhang from the stock. The agreement removes the threat of future litigation pertaining to bad loans that originated from 2000-2012, giving investors more clarity on the bank’s earnings power going forward.
  • In Europe, Citigroup Inc (NYSE:C) is poised to capitalize on increased regulatory burdens facing its European domiciled peers. Competitors such as German-based Deutsche Bank AG (USA) (NYSE:DB) need to adapt to new standards that restrict employee compensation and limit after-tax profits. Citigroup Inc (NYSE:C) will be advantaged to offer lower-cost services and capture market share over time.
  • Unlike American banks, Citigroup offers exposure to high-margin loan growth in Asia, Latin America, and other emerging nations. These markets are outside of the persistent low-interest environment here in the United States and the Eurozone. Citigroup is also a natural play on the globalization of business activity.
  • Given it’s improved financial position and 9.3% Tier I common ratio, Citigroup management is likely to propose a significant dividend increase and share repurchase plan for fiscal 2014. A 30% payout of first quarter 2013 earnings would equal $0.37 ($1.23 Q1 EPS x 0.30), a $1.48 annualized dividend payout and 3.0% yield based on recent market prices.

In addition to the above positives, Wall Street is becoming increasingly bullish on Citigroup. On June 13, research analysts at Credit Suisse issued an “outperform” rating and $60 price target on the stock.

A difficult investment banking environment

In April, the NYTimes Dealbook published an article titled The Problem With Investment Banks, as Seen By a Bank. The Times centers on a research note published by JPMorgan Chase & Co. (NYSE:JPM) analysts ahead of the bank’s Q1 2013 earnings call, which states “We see Tier I investment banks as non-investable.”

The report published by JPMorgan Chase & Co. (NYSE:JPM) advises its clients not to buy stock in competitors such as New York-based Goldman Sachs Group Inc (NYSE:GS) and German giant Deutsche Bank AG (USA) (NYSE:DB), but falls short on a buy/sell recommendation for JPMorgan Chase & Co. (NYSE:JPM) investors. All of these companies are considered to be Tier I investment banks.

If you’ve followed my writing at the Fool, you’re probably aware that Goldman Sachs Group Inc (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) dominate the investment banking business.

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