Citigroup: A Tale of Two Stocks

Here's an idea you might like: Sell Citigroup, and buy Citigroup. If you're wondering what the heck I'm talking about, here's an idea for you that no one is explaining to investors.

There are two Citigroups trading right now. Citigroup (NYSE: C), and Citigroup When Issued (NYSE: C-WD, C/I, or other symbols). It's a tale of two stocks which are essentially the same thing- one's simply cheaper.

Here's the skinny, and it's really rather interesting. Citigroup (NYSE: C) is the normal common stock that has been trading forever. Five trading days ago, the New York Stock Exchange came up with an idea to handle the huge demand to sell Citi common stock for investors that are holding convertible preferred shares, and want out.

In order to raise capital in the darkest time last year, Citigroup did a massive convertible preferred offering. If everyone holding converts, the I&O on Citgroup will go from 5.5 billion to 17.4 billion shares.

As is typical with newly issued convertible preferreds, the institutional investment world uses them as an arbitrage play to make money. They simply buy the newly issued convertible preferred, and then go short the common stock against their conversion. They lock in a guarantteed profit no matter where the stock trades to, and deliver the shares after the conversion.

Here's the problem that's been confounding in the Preferred Investors- they haven't been able to short the common stock, because no one has been able to get a "locate" on the shares- no one can borrow them to short. In theory, there would be a demand to short 17 billion shares, and today's there's only 5.5 billion in existance.

The registration statement was expected to go effective in April, but has been dragging out interminably for these arbitrage guys, and they have lost a lot of money not being able to short the common stock. Citi is one of the few "too big to go out of business" stocks that has not participated in the financial rally. Why? because institutional investors know there could be a technical overhang of 17 billion shares. In case you're wondering, after conversion, the US Government (Us) owns Citi at about $3.50.

So- here's what the NYSE did five trading days ago. They created a new security called Citigroup When Issued. It's a security that trades on the NYSE just below the price of Citigroup.

On my quote system, Citi When Issued trades under C/I. On Yahoo!, you'll find it under C-WD. I don't know what the symbol is on your quote service, and you might have to do some digging to figure it out.

The Citigroup When Issued is a security that has been invented by the NYSE for the convertible holders. They can sell their shares here, and deliver them after they are issued. Once this registration is effective, there will be a massive amount of paperwork and transferring back and forth, and it will take some time.

Eventually, after it's all said and done, Citi When Issued will be discontinued, and it will just become Citi again. Here's the trick- Citi When Issued trades about $.10 cheaper than Citi- but it's the same thing.

If you're a buyer, buy the When Issued. You'll save money.

More importantly, once everyone converts out of the Preferred, the overhang will be gone. Citi has not participated in the financials rally. Once the conversion is past, the overhang will have been absorbed, and there will be a massive improvement to Citi's balance sheet. In fact- the chart I'm showing is Citigroup's relative price performance to the XLF- the ETF for financials. As you can see, the XLF has traded up nicely while Citigroup lagged.

Citigroup (C) is a buy this week. The bottom will be made in conjunction with the Citi When Issued giving the sellers an exit strategy. If you want to own Citi- call your brokerage firm, figure out the symbol for the "When Issued" shares, and buy those.

Current quote: C is $2.70- C/I is $2.60. I am recommending Citigroup at $2.60- the "When Issued" shares. It's a double off these levels in my view.