Berkshire's Exit from Citi: A Signal to Rebalance Financial Exposure?

The investment world is abuzz after Berkshire Hathaway’s historic exit from its Citigroup (NYSE:C) stake—a position it held for over two decades. The move raises critical questions: Is Warren Buffett signaling skepticism toward legacy banks in a high-rate environment, or is this a strategic pivot toward undervalued sectors? For investors, this could be a clarion call to reassess financials exposure and embrace sector rotation principles.

Citigroup’s Undervaluation: A Contrarian Play or a Warning?

Citigroup’s current valuation metrics paint a compelling picture of undervaluation. Its intrinsic value stands at $119.99 per share, calculated as the average of discounted cash flow (DCF) and relative valuation methods, compared to its current market price of $75.72—a 37% discount (as of the latest data). Key ratios underscore this:

• Price-to-Book (P/B) Ratio: Citigroup trades at 0.61x book value, well below its 10-year median of 0.76x and the banking sector median of 0.85x.
• Price-to-Earnings (P/E) Ratio: While elevated at 16.58x versus its 5-year average of 8.89x, this reflects a rebound from pandemic lows rather than overvaluation.

Yet, this undervaluation hasn’t deterred Berkshire’s exit. So why sell?

The Macro Tailwinds (and Headwinds) for Banks

Legacy banks like Citigroup face dual pressures in today’s economic landscape:

1. High-Rate Environment: Rising rates have historically been a tailwind for banks’ net interest margins (NIM). However, prolonged high rates could strain borrowers and reduce loan demand, squeezing profitability. Citigroup’s NIM, while stable for now, is a critical metric to watch.
2. Regulatory and Technological Shifts: Fintech competition and post-crisis regulations continue to pressure traditional banks’ cost structures.

Berkshire’s Historical Sector Shifts: A Pattern of Pragmatism

Berkshire’s moves often reflect a pragmatic adherence to value investing principles. Consider its past shifts:

• Tech vs. Traditional: Berkshire reduced its stake in Apple (AAPL) during its growth spurt but later reinstated it, emphasizing adaptability.
• Energy Plays: The firm’s bet on Occidental Petroleum (OXY) highlights its focus on sectors with structural tailwinds.

Today’s exit from Citigroup may signal that even undervalued financials face headwinds in a sector increasingly dominated by tech-driven peers.

Sector Rotation: Time to Rebalance?

Value investors face a crossroads:

• Trim Financials Exposure: If macro risks persist, trimming financials—especially legacy players—to avoid NIM compression and regulatory drag makes sense.
• Rotate into Undervalued Sectors: Sectors like energy (e.g., Chevron (CVX), with a P/E of 15x vs. its 5-year average of 22x) or industrials (e.g., Caterpillar (CAT), trading at 1.1x P/B vs. a 5-year average of 1.5x) offer better risk-adjusted returns.

The Contrarian’s Dilemma: Citi as a Buy or a Sell?

While Citigroup’s valuation is compelling, its recent performance highlights risks:

• Analyst Estimates: Wall Street’s 1-year price target of $85.65 (13% upside) is modest compared to its intrinsic value. A low target of $70.70 underscores uncertainty.
• Peer Comparison: JPMorgan’s P/E of 12.8x and P/B of 2.1x suggest investors favor its scale and diversification over Citigroup’s regional focus.

Conclusion: Rebalance Now—But Stay Vigilant

Berkshire’s exit from Citigroup isn’t just a vote against one stock—it’s a broader signal to reassess financials exposure. In a world where macro risks loom large, sector rotation toward undervalued industries with structural growth (e.g., energy, tech-enabled industrials) could be prudent.

For contrarians, Citigroup’s 37% discount to intrinsic value remains tempting, but the sector’s vulnerabilities demand caution. Investors should use this as a chance to trim financials and reallocate to undervalued opportunities. The market rarely rewards complacency—act now before the rotation becomes a rout.

Final Call to Action: Trim financials exposure to 5% of your portfolio and redeploy capital into sectors trading at meaningful discounts to historical norms. The time to rebalance is now.

Data as of May 2025. Past performance does not guarantee future results.