Citigroup’s $2.53 million contingent coupon autocall to offer tech exposure to popular stocks

By Emma Trincal

New York, July 8 – Citigroup Global Markets Holdings Inc.’s $2.53 million of autocallable contingent coupon equity-linked securities due June 28, 2023 tied to the worst performing of the common stocks of Amazon.com, Inc., Apple Inc., Microsoft Corp. and Netflix, Inc. was one of the latest deals tied to technology and momentum stocks, which have seen their valuations surge since the market lows, leading the recovery rally.

The notes carry a coupon of 11% per year, payable quarterly if each asset closes above its coupon barrier, 55% of its initial level, on the observation date for that period, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be automatically redeemed at par if the worst-performing asset closes at or above its initial level on any quarterly autocall date.

If the notes are not called and each asset closes at or above its 55% barrier level, the payout at maturity will be par. Otherwise, investors will be fully exposed to the loss of the least performing asset.

Trendy picks

Although tech stocks have led the bull market following the February crash, they still have the potential to continue to rise, according to Matt Rosenberg, head of trading and strategic initiatives at Halo Investing.

“People are getting more comfortable with tech names. We don’t see their price appreciation as a remake of the dot.com bubble. We think there is still further potential upside.”

Two of the four underlying stocks are part of the so-called FANG stocks group, which consists of Facebook, Amazon, Netflix and Alphabet.

Value

Some analysts have raised concerns over the appeal of FANG and tech names among momentum traders, driving valuations at levels that may not be supported by fundamentals.

But Rosenberg said that the underlying stocks in the notes are large, well-known multi-national companies whose growth and rising revenues as well as growing market shares due to their “disruptive” business models more than justify current valuations.

“The Covid-19 lockdowns have shown how much stocks like Amazon and Netflix are integrated in every person’s life. People like the FANG. The rally was led by those names,” he said.

The meteoric price rise of the underliers is baffling for value investors. Amazon’s share price is up more than two-thirds this year despite the sell-off. Netflix rose 55.4%, Microsoft is up 35% and Apple rose nearly 30%.

Terms

“This is a good note for income over the next three to 12 months,” he said.

“Then you’ll get called, and if not, the 45% protection is pretty substantial even for those stocks.”

During the six-week bear market in February and March, each of those stocks fell but not by as much as the contingent protection amount.

Apple lost the most, shedding 31.4%. Microsoft dropped 27.6%. Amazon was down 22% and Netflix, 21%.

The pricing of the notes is in line with current market conditions, Rosenberg added.

“Twelve months ago, a tactical FANG autocall like this one would have priced with a 25% protection, not 45%.

“45% over a three-year timeframe if pretty defensive in my view, regardless of how much these stocks continue to rise.

“These are businesses that are growing fast.

“And we’re talking about the biggest companies in the world with market cap of over $1.5 trillion, not the latest IPO or high-flying tech stock,” he said.

Risk-adjusted return

David Kostin, chief U.S. equity strategist at Goldman Sachs & Co. LLC, in a recent research report on the firm’s high Sharpe ratio basket, recommended overweight positioning in information technology and real estate.

“At the sector level, Info Tech has posted the strongest absolute and risk-adjusted returns year to date. Amid the economic downturn, the cyclical energy, financials, and industrials sectors have performed the worst.”

The notes are guaranteed by Citigroup Inc.

Citigroup Global Markets Inc. is the underwriter.

The notes settled on June 30.

The Cusip number is 17324XN71.

The fee is 3.25%.

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