ValueAct Capital Just Bought $1.2 Billion Of This Stock….
If you ask me, $1.2 billion is a lot of money.
Even for Jeffrey Ubben (that handsome devil!) and ValueAct Capital $1.2 billion is a lot of money.
Therefore I think I can safely conclude that when Ubben has ValueAct invest $1.2 billion into a single company…….that he must have serious conviction in the investment idea.
ValueAct Capital’s Q1 letter disclosed this $1.2 billion position in a single company. In the Q1 letter ValueAct (or Ubben if you prefer) noted that his best investments have been in sectors that have fallen out of favor.
Ubben explained that ValueAct’s portfolio often has some 30% invested in “out-of-favor sectors” at any given time. Past instances would include vertical software companies after the tech bubble popped in the early 2000s to legacy PC companies during the “mobility and cloud era.”
All right…..get to the point already!
Today Ubben sees bank stocks as out-of-favor, with the “U.S. banking system now having a structurally lower risk profile than any time in our investing lifetimes.” Ubben believes that the world’s central banks have successfully intervened in the industry, resulting in banks that are less leveraged, own higher quality assets, and are supported by more stable funding models.
The bank that ValueAct has invested a massive $1.2 billion into is Citigroup (C).
Ubben believes the bank has about $50 billion in free cash it could easily return to shareholders over the next two years in dividends or share buybacks without affecting its ability to achieve its earnings growth targets. Beyond that, Ubben believes that the New York-based bank has the ability to return $18 billion to $20 billion of capital a year.
As far as why shares are cheap today, Ubben argues that Citigroup is misunderstood and that the market is too focused on short-term quarterly volatility instead of on Citigroup’s excellent long-term prospects.
Ubben believes that Citigroup could generate a return of 15 percent or more on tangible common equity and deliver earnings per share of at least $10 by 2020, or more than double the earnings per share produced in 2017. That would have to do good things for Citigroup’s share price.