Citigroup comes in at #4 in the week-long countdown of the top five S&P 500 stocks to own for 2015. This is a company that spent years lost in the wilderness. But despite its messy past, Citigroup should charge forward in 2015. First of all, the stock is insanely cheap trading at a 20% discount to its tangible book value. That means the stock is literally worth less than the current value of Citi’s assets. That’s undeserved, as Citi has a clear path to achieving a significantly higher valuation through cost cuts, returning capital to shareholders, a recovery in trading activity, and the continued resolution of CitiHoldings–this is the so-called bad bank that Citi created in order to cordon off all of its lousy loans during the financial crisis. Within CitiHoldings are Citi’s deferred tax assets, and these assets represent $17 per share, a whole lot for a $52 stock. Currently, the bank earns nothing on these tax credits; but over time, as Citigroup continues to turn a profit, these deferred tax assets will be used, transforming into real cash via a lower tax bill, cash that can be loaned out or invested. But more important, the bad bank here, CitiHoldings, is now turning around in a major way–in its last two quarters, it actually turned a profit. Finally, now that CEO Michael Corbat has righted the ship, the regulators will allow Citi to return cash to shareholders via big dividends and buybacks. Over the next year and a half, this revitalized bank should trade up to $65, or a 25% premium to its current price.
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