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Motley Fool: Banking on profits

While the next few months, even quarters, could be rocky, Citigroup should be a good long-term investment coming out of the recession.  (Associated Press)
While the next few months, even quarters, could be rocky, Citigroup should be a good long-term investment coming out of the recession. (Associated Press)

Citigroup (NYSE: C) is a blue-chip stock on sale, with its shares recently down almost 20% from their 52-week highs. One of the biggest banks in the world, Citigroup has been pressured by the pandemic and fears of what it might do to Citigroup’s business. Low interest rates have also hurt its ability to generate meaningful interest income, while employee errors also cost the company.

Citigroup is soon to be under new management, though, with incoming CEO Jane Fraser – the first woman ever to lead a large Wall Street bank. It’s spending more than $1 billion to improve internal controls, and reports, “The entire management team is committed to achieving operational excellence and a best-in-class risk and control environment.” The company is also restructuring itself, and Fraser may be eyeing more global expansion.

The world’s eventual recovery from the pandemic will boost Citigroup’s business as well, as more people work, spend, take out loans and pay off debt.

Overall, Citigroup should be a less risky stock in the future. While the next few months, even quarters, could be rocky, Citigroup should be a good long-term investment coming out of the recession. Management plans to buy back $1.8 billion in stock, and possibly much more. (Buybacks may benefit shareholders if they’re executed when shares are undervalued.) Meanwhile, patient believers can enjoy Citigroup’s dividend, which recently yielded a respectable 3.1%.

Ask the Fool

Q: I read that Zoom Video Communications had a secondary offering. What does that mean? – T.R., Cedar Crest, New Mexico

A: It means Zoom sold more of its shares to raise money – in this case, about $2 billion. When a company debuts on the stock market, it usually has an initial public offering, or IPO, selling shares to the public and collecting money from the sale. (The shares will then trade hands on the market, but the company doesn’t profit directly from that.) If the company later needs a cash boost, perhaps to grow faster, it has choices: It could sell off some assets, borrow money – or sell more shares of stock, via a secondary offering.

If a company’s shares have skyrocketed, as Zoom’s have, because of videoconferencing demand during the pandemic, it will collect a lot of money for each share.

The downside of offering new shares for sale is that doing so dilutes the value of existing shares. Imagine, for example, a company with 100 shares of stock outstanding. If you own 10 of them, you own 10% of the company. If it issues 20 more shares, though, your 10 shares will only be 1/12th of the company, or 8.3%.

Q: What are the best books about Warren Buffett? – P.L., Wilkes Barre, Pennsylvania

A: Try Roger Lowenstein’s “Buffett: The Making of an American Capitalist” (Random House, $20) for a great review of his personal and business history, along with his investment thinking. You can learn a lot through Buffett’s own words via Carol J. Loomis’ “Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013” (Portfolio, $18) and Lawrence A. Cunningham’s “The Essays of Warren Buffett: Lessons for Corporate America” (Carolina Academic Press, $35).

My dumbest investment

Go Solar USA was the first stock I ever owned. As I write this, it trades at $0.006 per share, and it taught me what a lot of experts say about penny stocks: You can’t get rich overnight. – C.S., online

The Fool responds: Many experts consider penny stocks far too volatile and dangerous for investors, and we have long warned against them ourselves. (A penny stock these days is one trading for less than about $5 per share.) But they continue to attract many investors – typically naïve ones.

If you have $1,000 to invest, for example, being able to buy, say, 10,000 shares of a $0.10 stock can seem better than buying 10 shares of a $100 stock. It can indeed seem like you can get rich overnight with such seemingly bargain-priced stocks. But even low-priced stocks can fall, and penny stocks often do. Indeed, Go Solar USA’s shares have recently traded as low as $0.001 per share and have been volatile.

If you’d wanted to invest in solar energy, a better move would have been to pick a few established, growing and profitable solar stocks – or a mutual fund or exchange-traded fund, or ETF, that focused on solar energy companies or alternative or renewable energy companies. Two ETFs to consider, especially if their prices retract a bit, are the Invesco WilderHill Clean Energy ETF (PBW) and the iShares Global Clean Energy ETF (ICLN).

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