A Smarter Citigroup Play

Joe Bel Bruno has a good piece of reporting in today’s WSJ, saying that Citigroup shares have been bought in large numbers by retail investors looking for outsize returns.

Some discount-brokerage firms report a surge of individual, or retail, investors buying shares of Citigroup during the past five months, amid the New York bank’s stock-price slide…

“We’re speculators, and that can be really risky, but it’s worth it to take a shot,” said Jin Chen, a 22-year-old Rowland Heights, Calif., resident who recently bought 10,000 shares of Citigroup at $3.10 a share. “This is my opportunity to make some money.”

“Most brokerage customers are looking at a portfolio down 50% from a year ago, and thinking that they have to get even,” said Don Montanaro, TradeKing’s chairman and chief executive.

Citigroup stock is highly volatile — as is any stock trading on option value — and it’s tempting to look at the history of Citi’s share price and decide that if you’d bought at the bottom in March, you would have more than doubled your money right now.

But no retail investors should be going anywhere near Citigroup stock right now. Yes, you might have lost a lot of money in the market, but it’s not smart to try to get it back by taking wild gambles. And a glance at Citi’s preferred shares is all you need to see that the market is still pricing in some massive dilution of Citi common.

If you really feel the need to express the view that the government will always bail out the banks, then Bruce Kelly has a much better idea: buy PFF, the ETF of preferred shares. It’s chock-full of financials, which means that you’re not exposed to idiosyncratic Citigroup risk, it’s yielding a juicy 14% right now, and its expense ratio is very low. If the preferred does end up getting swapped into common equity, you’re better off buying common stock this way than buying it directly today. If it doesn’t, then you get a very nice yield on your money.

Then again, if you’re a 22-year-old making $30,000 bets on Citigroup, perhaps all you’re interested in is excitement. But there are surely cheaper ways of finding that.