Hedge Funds’ Bet on Corbat Pays Off as Citigroup SurgesDakin Campbell
Moore Capital Management LP and Appaloosa Management LP are among hedge fund firms that counted Citigroup Inc. among their top holdings before the bank posted a 16 percent rally in a month and a half.
Moore Capital, run by Louis Moore Bacon, boosted its stake in the New York-based bank by 11 percent to 5.23 million shares, which were valued at $231.2 million at the end of the first quarter, filings yesterday show. Appaloosa, run by David Tepper, held 8.5 million shares valued at $376.9 million after paring its stake by 7.3 percent.
Investors are wagering that banks battered most by the credit crisis will outperform peers as the Federal Reserve continues buying bonds to stimulate the economy. Firms such as Moore Capital and Odey Asset Management Group Ltd. bet on Bank of America Corp. last year, when the stock more than doubled. Citigroup, led by Chief Executive Officer Michael Corbat, is the latest favorite after he replaced Vikram Pandit in October.
“The new CEO has gotten an immediate vote of approval,” said Michael Holland, chairman of New York-based Holland & Co., which oversees more than $4 billion and doesn’t hold Citigroup. The bank’s businesses had “been so beaten up in public investors’ mind. Now that things are beginning to heal the valuations are starting to climb.”
Citigroup advanced 2.5 percent yesterday to $51.34 and has been the best performer since March in the KBW Bank Index of 24 U.S. lenders. The shares have climbed 40 percent since Corbat took over Oct. 16, outpacing the 20 percent gain of the bank index and 15 percent rise in the Standard & Poor’s 500 Index.
The broader S&P hit a record high yesterday for a fourth straight session as weakness in manufacturing and a drop in wholesale inflation fueled bets the Fed will be in no hurry to scale back bond purchases. The central bank has announced three programs of debt buys to keep interest rates at historic lows.
Blue Ridge Capital LLC, run by John Griffin, and Columbus Circle Investors Inc. were among new Citigroup shareholders in the first quarter, filings show.
Blue Ridge, one of the so-called Tiger Cubs that trace their roots to Julian Robertson, founder of Tiger Management LLC, bought 4.66 million shares valued at $206.2 million at the end of March, according to filings. Columbus Circle, the Stamford, Connecticut-based investment firm that manages more than $14.5 billion, added 1.54 million shares.
“There is a bandwagon effect,” Holland said. “When things are getting better people don’t want to miss out.”
Omega Advisors Inc., the hedge fund run by Leon Cooperman, increased its Citigroup holding by almost 150 percent and held 2.24 million shares valued at $99.2 million at the end of March.
“If we own it, it’s because we think it’s undervalued,” Cooperman said in an e-mail. “Hope we’re right.”
Some Wall Street analysts see more upside for Citigroup. Michael Mayo of CLSA Ltd. reversed a five-year stance of telling investors to sell the shares after Corbat became CEO. Mayo, whose clients include hedge funds, changed his rating in October to outperform from underperform as Pandit’s ouster reflects a “more proactive board,” he wrote at the time. In January, he raised the recommendation to buy.
Scotia Capital Inc.’s Kevin Choquette made the bank a “focus stock” for clients in January.
Still, the stock may be running out of steam. It’s close to the 12-month price target of $54.16 estimated by 25 analysts surveyed by Bloomberg, and while first-quarter results showed an increase in revenue, that was helped by hedging and excluded accounting adjustments.
Some investors joined Tepper’s Appaloosa in paring their Citigroup stakes, including George Soros’s Soros Fund Management LLC, which sold 7.58 million shares and held less than 545,000 at the end of the first quarter. York Capital Management LP sold all of its 2.73 million shares.
Soros also liquidated all of its 4.1 million Morgan Stanley shares, joining Third Point LLC, the hedge-fund firm led by Daniel Loeb, which exited its stake of 7.75 million shares. Morgan Stanley, owner of the world’s biggest brokerage, fell to a three-month low April 18 after reporting the largest drop in trading revenue among the six banks.
Third Point said in a January letter that shares of Morgan Stanley may rise to almost $40 as the investment bank improves brokerage margins and management devises a “bold fix” for the fixed-income business.
Other investors took positions in New York-based Morgan Stanley amid Loeb’s exit. Lansdowne Partners Ltd., one of the biggest European hedge funds that invests in equities, bought 1.92 million shares valued at $42.2 million at the end of March, while Moore Capital purchased 4.49 million shares valued at $98.6 million.
While the combined first-quarter profit for the six biggest U.S. banks increased by 45 percent, their combined revenue fell, leaving most of them to rely on a mix of tax benefits, staff reductions and cost cuts to increase earnings.
Citigroup, the third-biggest lender, and No. 2 Bank of America “had tremendous problems,” said Tom Brown, CEO of Second Curve Capital LLC, a New York hedge fund that owns stakes in both.
“Now it’s just betting the management teams at both companies can reduce expenses relative to revenues,” Brown said. “And they will generate a tremendous amount of excess capital so we will see favorable capital actions,” such as dividend increases and share repurchases, he said. Citigroup is a better long-term bet because of its emerging-markets and transaction-processing businesses, he said.
Bank shares, which have been held back amid new regulations, will climb higher and toward their full book values as the rules are finalized, Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein said yesterday in a presentation in Santiago, Chile.
“Regulation will not turn up as bad as it’s judged to be, the economic certainties will clear up and people will decide there’s growth,” Blankfein said.