Source: PaxForex Premium Analytics Portal, Fundamental Insight

While stocks crashed in the first quarter of the year, legendary investor Warren Buffett and his Berkshire Hathaway were buying, especially in the financial sector.

In Berkshire Hathaway's Form 13F filing, which shows what stocks the conglomerate bought and sold in Q1, the company showed that it bought a stake in the weakened megabank Citigroup. Berkshire bought 55.2 million shares, or about 2.8 percent of Citigroup's outstanding shares, for a total of about $2.95 billion. The average price per share for Berkshire was about $53.40.

At the close of trading Monday, Citigroup shares were down about 21% this year, approaching levels not seen since the pandemic in 2020. Is now a good time for Berkshire - or anyone else - to own them?

Buffett has long been known as a value investor - he tries to find stocks trading below their intrinsic value, which he believes should be priced higher. Currently, there is no better value play in the banking sector than Citigroup. The bank currently trades at less than 60% of its book value, which is essentially the bank's net worth.

As you can see above, Citigroup is trading at a significant discount to its peer group. There are good reasons for this, of course. Over the years, the bank has had lower returns than its peers and has failed to clean up its act from a regulatory standpoint.

In 2020, federal regulators imposed a $400 million fine on Citigroup. At the same time, the U.S. Office of the Comptroller of the Currency (OCC), which regulates national banks, issued a cease-and-desist order to Citigroup for failing to enhance internal management related to compliance, data, and risk management.

These regulatory problems have led to a significant increase in Citigroup's spending in 2021, with high spending expected this year as well. Earlier this year, Citigroup reported even more disappointing news at investor day, announcing that it expects to generate a return on tangible total equity of 11% to 12% over the medium term, well below the targets of other large banks.

However, former Citigroup CEO Michael Corbat resigned just as the regulator's order was released, and the bank appointed Jane Fraser to take his place. Fraser wasted no time in announcing a strategy update. The bank announced projects to sell many of its international consumer services divisions, including its very profitable operations in Mexico. Citigroup also plans to double down in areas where it is already strong, including investment banking and asset management.

Citigroup's transformation plan will likely take several years. But in that time, Buffett and Berkshire will be well compensated, which is one of the reasons Buffett likes Citigroup. At Monday's $47.46 share price, Citigroup's annual dividend yield was 4.3 percent. It also has a modest dividend payout ratio of 28%. Banks, in general, typically have payout ratios in the 30% to 40% range, so there is room for dividend growth in the future.

However, Citigroup is likely to use any excess capital to buy back its own stock, which it did last year and in the Q1 of this year. For banks, buying back shares below book value is extremely advantageous because the buyback increases book value. Banks trade relative to this key metric, so an increase in book value tends to benefit the stock in the long run.

Citigroup may be limited in its ability to buy back shares before the end of the year because of regulatory capital constraints, but management has made it clear that it will conduct modest buybacks this year when it can. In addition, when the bank completes the sale of its international consumer lending units, it will free up capital that the bank can use to buy back shares.

Citigroup's path is not an easy one. In addition, after years of unfulfilled promises, the market will view it with enormous skepticism. Buffett knows this, and since Berkshire's stake is less than $3 billion, Citigroup makes up less than 1% of his $340 billion stock portfolio.

But with a fairly new management team in place, a clear transformation plan, and such a discount in the stock price, Citigroup could be a great long-term investment right now. After all, if Citigroup could only trade at tangible book value - which would still mean a significant discount compared to peers - it would trade at $79 a share, which suggests more than 60 percent upside potential. And while you wait for the transformation to happen, you could make good money on Citigroup through dividends and any near-term share buybacks.

As long as the price is below the 54.00 level, follow the recommendations below:

• Time frame: D1
• Recommendation: short position
• Entry point: 49.21
• Take Profit 1:  45.00
• Take Profit 2: 41.00

Alternative scenario:

If the level of 54.00 is broken-out, follow the recommendations below:

• Time frame: D1
• Recommendation: long position
• Entry point: 54.00
• Take Profit 1: 58.00
• Take Profit 2: 62.00