Why Bill Ackman Bought Citigroup (C) ~ market folly

Tuesday, June 1, 2010

Why Bill Ackman Bought Citigroup (C)

Last week we detailed a summary of investment ideas from various hedge fund managers at the Ira Sohn Conference. Pershing Square's Bill Ackman was one of the many speakers and though he ran out of time in his presentation, he did briefly mention he had purchased 150 million shares of Citigroup (C). Ackman was then recently interviewed by Yahoo TechTicker to talk about Christine Richard's new book which he is the subject of, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. However, TechTicker also had the chance to ask him about his new purchase.

Ackman was actually surprised when he took this stake because back in the throngs of the crisis he could never see himself owning a financial company only twelve months later. Keep in mind that the US government recently announced the sale of 1.5 billion shares of Citigroup (C) and they have plenty more to sell. This fact has acted as somewhat of an overhang on the stock. But Ackman certainly isn't bashful and dove right in.

While Ackman fully admits that Citigroup is still working through their problems, he sees them as one of the "best capitalized banks" out there currently due to the conversion of the government's preferred stake. Elaborating on this thesis, Ackman thinks the zero rate interest policy is benefiting the bank as they are earning very attractive spreads. Lastly, he loves their solid balance sheet backed by a huge deposit base. So, it definitely sounds as though he believes he's buying a proven franchise in recovery mode. For the rest of Ackman's investments, we've detailed Pershing Square's portfolio.

Ackman isn't the only prominent hedgie who recently bought shares either. Phil Falcone's Harbinger Capital Partners recently disclosed a new massive stake in Citigroup. Not to mention, John Paulson's hedge fund owns a large position as well. At the same time though, we also saw Dan Loeb's Third Point exit C in the first quarter, Lee Ainslie's Maverick Capital dump their position and Andreas Halvorsen's Viking Global also sold out, so not everyone out there is bullish on Citi. David Tepper's Appaloosa Management trimmed over half of their stake in C, but it is still one of their largest equity positions. Overall though, Citigroup is still one of the most important stocks to hedge funds as determined by Goldman Sachs' VIP list.

Shifting back to Ackman's thoughts on the market overall he said, "Look at large-cap, very high quality businesses today [and] they seem pretty cheap to me." Embedded below is Ackman's video interview from TechTicker:

His overall sentiment that mega cap stocks are undervalued is a common belief held by numerous investment managers. At the Ira Sohn, Jeremy Grantham also said to buy high quality stocks as well because the massively momentous market rally of 2009 largely left higher quality names behind as managers re-risked and favored stocks of lower quality. Ackman thinks Citigroup is one of those high quality names and is bullish on shares, despite the impending sale of the government's stake. We'll definitely keep an eye on this one to see how it turns out. For more of the latest moves from prominent investment managers, head to notes from the Ira Sohn Conference as well as our daily hedge fund tracking series.

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