2 Stocks That Could Lead the Market Higher

Stocks moved ahead today, with the Dow Jones Industrial Average (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) up 0.6% and 0.2%, respectively. The Dow's top gainer was Bank of America (NYS: BAC) , up 5.7%, but the story was about its nearest rival:

The micro view: Citigroup's (NYS: C) new CEO, Michael Corbat, is making his mark on the company he inherited from Vikram Pandit -- with an ax. The bank announced today it will cut 11,000 jobs worldwide (4.2% of the workforce, as of the end of the third quarter), taking a $1 billion fourth-quarter charge in the process. The market cheered the announcement, bidding the shares up 6.3%, adding $6.4 billion to company's market value.

The cost-cutting plan aims to deliver $900 million in savings next year and $1.1 billion annually beyond that, with a loss in annual revenue of $300 million, for incremental profit of $800 million. Discount that "annuity" at a back-of-the-envelope cost of equity of 10.5%, and you get $7.6 billion. Adjust for the upfront charge and the lower savings in year one, and you get:

$7.6 billion-$1.0 billion-$200 million = $6.4 billion

Maybe there is something to this market efficiency voodoo, after all. In any event, shares of Citigroup's closest competitors, Bank of America (NYS: BAC) and JPMorgan Chase (NYS: JPM) , traded up in sympathy, with gains of 5.7% and 1.6%, respectively. The difference in appreciation between the two suggests the market believes B of A is a better candidate for a similar cost-cutting program than JPMorgan -- I agree.

Even after today's pop, JPMorgan is the only among the three that trades at a premium to its tangible book value. B of A and Citi trade at a rather remarkable discounts -- 21% and 31%, respectively. That suggests the potential for further gains is far from exhausted. To find out why our top financials analyst wrote recently that owning B of A shares "could result in a double or triple within the next five years," click here to receive our premium report, which includes a full year of ongoing coverage.

The article 2 Stocks That Could Lead the Market Higher originally appeared on Fool.com.

Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.