Citigroup’s 9%-11% single observation ELKS linked to Netflix may underperform short-term trade

By Emma Trincal

New York, Sept. 9 – Citigroup Inc.’s 9% to 11% single observation Equity Linked Securities due Oct. 3, 2016 linked to Netflix, Inc. shares may offer a lower return than an outright investment or even a quick trade in the stock without necessarily providing enough protection given the high volatility of the underlying stock, sources said.

The payout at maturity will be par unless the stock finishes below the 70% trigger level, in which case investors will receive a number of Netflix shares equal to $10 divided by the initial share price or, at the issuer’s option, the cash equivalent, according to a 424B2 filing with the Securities and Exchange Commission.

Interest will be payable monthly. The exact interest rate will be set at pricing.

A trader said that the coupon, which he hypothetically said would be 10%, at the mid-point of the range, is probably not enough compared to what a shareholder could achieve in a matter of weeks, if not days.

High flyer

“I’m looking at the chart. Most recently on Jan. 12, the stock hit a low at $45.55. On Aug. 6, it closed at a $126.45 high. That’s a 177% return in just about seven months. We know it can go up,” the trader said.

On Tuesday, the stock closed at $94.95, he noted, which represented a 25% decline since the high in early August.

“We know that Netflix can definitely move around,” he said.

The share price closed at $99.18 on Wednesday.

“It would seem to me that the bias of that stock is upward. The outlook for the company is pretty positive with their subscription base and the popularity of their programming,” he added.

“The stock has been down lately, but the whole world has been caught in the correction.

“If the notes priced today, you would expect a maximum return of about 110. You’d have to hold the notes for a year to get that. Well, we closed at $115 last week, on Monday.

“Being locked in for a year for a return you can get in a week doesn’t seem like such a great idea to me.

“More importantly, limiting my upside to 10% in a stock that can triple in price in a short amount of time is not worth the protection of 30%.

“Netflix is a momentum stock. It would work better as a short-term trade.”

Overvalued

An equity analyst who covers the stock had no view on the notes but was bearish long-term on the stock.

“This is a stock that has the ability to move around a lot. Any type of structured product, you’d have to be wary about the capacity for the stock price to go outside a given range,” he said.

Without mentioning a range, the prospectus shows that investors need the stock to finish within a price range of approximately $70 to $110.

“We are bearish on the stock with a three-year target of $69,” he said.

“We are not bearish on the company though. Netflix is growing. It has a stronger streaming base, and it is expanding worldwide. But we think the stock is overvalued.”

Citigroup Global Markets Inc. is the underwriter.

The notes will price on Sept. 24.

The Cusip number is 17298C2D9.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.