1 Stock to Buy in February

File this stock pick under big potential risk, big potential reward.

I actually may be understating that. I'm talking about one of the riskiest players in a very uncertain industry.

Here's the bombshell: It's Citigroup (NYSE: C  ) . Your initial reaction may be to click away. Quickly. But before you do, know that there is a strong turnaround case to be made here.

In the past, Citigroup has been everything we hate in too-big-to-fail banks. It was the original megabank that blew through the Glass-Steagall ceiling. That was the sensible post-Great Depression legislation that kept banks separate from insurance companies and separate from investment banks. With the help of some late 1990's legislation repealing Glass-Steagall, Citi at one point had a bank (Citicorp), an insurer (Travelers), and an investment bank (the combination of Salomon Brothers and Smith Barney) all under one roof.

What's Citigroup like today? Well, like Bank of America (NYSE: BAC  ) , it's a company that survived the financial crisis thanks only to the extraordinary help of the federal government. But also like B of A, it also seems to be realizing that a company can be both too big to fail and too big to succeed.

Citigroup's current leadership team is scaling down the giant. Citigroup divided its operations into two parts -- often called "Good Citi" and "Bad Citi." Think of "Good Citi" as the healthy core part and "Bad Citi" as the portion the bank is trying to get rid of or rehab. In the first quarter, the "Bad Citi" will fall to about 12% of the company.

Yes, part of this "Good Citi"/"Bad Citi" distinction is public relations horse pucky, but Citigroup really is scaling back. Its total assets are now 20% less than they were at their peak in 2007 -- that's a reduction of almost half a trillion dollars. Those shed assets would rank as the seventh largest bank in the U.S.!

Let's also remember that the current leadership team can't be blamed for sins of the peak bubble years. They rode in after the damage had already been done. Its CEO, Vikram Pandit, took control in late 2007. Its chairman of the board and CFO were both appointed in 2009.

As an added stewardship bonus, Citigroup has split its CEO and board chairman roles. That may not seem like a big deal, but the same can't be said for Wells Fargo (NYSE: WFC  ) , JPMorgan (NYSE: JPM  ) , Goldman Sachs, and Morgan Stanley.

The combination of better management, the gutting of non-core assets, and the improving economy has put Citigroup in a much healthier position than it was in a few years ago. Its Tier 1 capital ratio has almost doubled to a strong 13.6%, its leverage has dropped from close to 30:1 (assets to common equity) to just over 10:1, and it's provisioning a whopping 4.7% of its loans. That last figure results in over $2.50 of provisioning for every dollar of bad loans on its books.

In other words, all these figures point to a much more conservative Citigroup.

Now, does that mean the risk is gone? Heck no!  

Citigroup still gets roughly half its sales as a Main Street bank and half as a Wall Street bank. The Wall Street half can hide many whammies in the form of derivatives and exotic structures. Even with more regulatory scrutiny and hand-tying.

And Citigroup's greatest opportunity may be its greatest risk. More than any other large U.S. bank, Citigroup is a true global player. Only 35% of its sales come from North America. The other two-thirds of its sales is pretty evenly distributed among its three other regions: Asia, EMEA (Europe/Middle East/Africa), and Latin America.

Opportunity takes the form of outsize margins. In North America, Citi's net profit margin before taxes was 26% in 2011. For the rest of the world, that figure was 37%. That's almost 50% more profitable!

Let's not forget the future growth prospects for Asia and Latin America. And even in crippled Europe, Citigroup sees some opportunity. CEO Pandit has pointed out that Europe's $40 trillion in banking assets will be shrinking going forward. That creates some opportunities not only in Europe but also in emerging markets, because European banks hold 65% of emerging-market debt.

So there are big opportunities. But there are also big risks attached to them. Although its European operations have been doing relatively well so far, poor economic and sovereign debt situations usually don't end well for banks. On the Asian and Latin American front, Citi has built out its footprint better than any U.S. bank, and even as it pares down its balance sheet it's investing in these growth prospects.

If the highly predicted long-term growth rates come to fruition in those regions, Citi can benefit enormously. But if they falter (e.g., the Chinese real estate bubble), Citi could be riding into the next economic crisis. Especially if it hasn't significantly beefed up its risk practices of the past.

Remember, "the past" was just a few short years ago. Within the last five years, it has gone to the brink of going under, gotten massively rescued by the government, and effectively gotten its blue chip status revoked by being kicked out of the Dow Jones Industrial Average (INDEX: ^DJI  ) -- and replaced by a company it spun off (Travelers), no less!

Today, I believe Citigroup is poised to beat the Dow. There's certainly much risk, but its balance sheet and its operations are much improved, and a dividend boost could be a catalyst. As for future growth, more than any other U.S. bank, Citigroup's poised to benefit from a global economy. For all this opportunity, I'm willing to take on the risk at these prices -- Citi's trading for just 50% of its book value.

I'm clearly bullish on Citigroup as a risky global opportunity for 2012 and beyond. But our chief investment officer has identified a different company as his No. 1 stock for the next year. Find out which emerging-markets-focused stock he likes in our brand-new free report: "The Motley Fool's Top Stock for 2012." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this legendary company.

Anand Chokkavelu owns shares of Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup. He also owns warrants in JPMorgan Chase, Wells Fargo, and Citigroup, and long-dated options in Bank of America. The Motley Fool owns shares of Citigroup, Bank of America, Wells Fargo, and JPMorgan Chase. The Fool owns shares of and has created a covered strangle position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. We Fools may not 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.


Read/Post Comments (18) | Recommend This Article (124)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 02, 2012, at 3:59 PM, rhealth wrote:

    I bought a tentative stake in C a while back under this good Citi/bad Citi idea. It could pan out, and I hope it does. What makes this a high risk proposition, more than the current climate of world and national financials is the tendency, like a five year old, as soon as things are looking up to turn to speculative and derivative gambling again, knowing they'll get bailed out no matter what.

    I don't know who's worse the bailed out or the bailers!

  • Report this Comment On February 02, 2012, at 5:28 PM, maccdw wrote:

    Investing in C or any of the majors who torpedoed the economy is truly a "foolish" move, and I mean that in a less-than-complimentary manner. As a group, C and its fellow IBs did more damage to more citizens than ever before.

    And, if the GOP can seriously define corporations as people, then C was a jerk, and is a jerk, as they are the same person they were in 2006-2009.

    MF, you are as morally bankrupt as the major banks in which you suggest we invest.

    Thanks for watching out for the 1%.

  • Report this Comment On February 02, 2012, at 5:39 PM, StarWitchDoctor wrote:

    rhealth

    Hope is composed of four letters.

    Maccdw

    The government actions are not being defended here. Making money off the status quo is far from immoral, while the actions of our politicians could be questioned, the actions of investors are self explanatory - we intend to make money within the rules set by our politicians.

    Scott

  • Report this Comment On February 02, 2012, at 6:06 PM, maccdw wrote:

    Scott,

    Where did I infer that "government actions" are being defended? My message is much simpler--> Go ahead, everyone, and invest in the same mega banks that wrecked our economy. Yeah, you'll earn some $, but the too-big-to-fail banks, such as C, will just go on to buy your so-called elected reps, until they crash the economy again.

    IOW, Scott and readers, I simply point out that this "system" we have, rules and all, won't ever improve (preserve our personal holdings) until we--the vast numbers among us--change our mind set. Until then, it's good old "caveat emptor" for you and me, but it's "we will be saved by the taxpayers if we screw up, so what's the issue?" for C and the majors.

    Don't put words into my posts, OK, Scott?

  • Report this Comment On February 02, 2012, at 7:34 PM, rocketman67 wrote:

    "As an added stewardship bonus, Citigroup has split its CEO and board chairman roles".

    Citigroup is still not slaughtering the 'Fat'ed Cow'!

    They will instead lay off the people whom had nothing to do with the bad business decisions that were made by those in the 'Ivory Towers'!

  • Report this Comment On February 02, 2012, at 9:58 PM, tybeesound wrote:

    I agree with maccdw. Investing in any of the big banks is a sucker play. What you might make on them will be sacrificed when they crash the economy again. Instead of starving government, why not starve Wall Street? And shame on you MF for making such an immoral rec.

  • Report this Comment On February 02, 2012, at 10:02 PM, Don354 wrote:

    As long as Jon Corzine is involved in finance, "thanks, but no thanks." There are many more like him that cannot be trusted.

  • Report this Comment On February 02, 2012, at 10:32 PM, bbell46356 wrote:

    I would not but the stock for the same reason I don't own Phillip Morris or Wynn. I don't want to be associated with the sin industries.

  • Report this Comment On February 02, 2012, at 11:51 PM, TMFBomb wrote:

    Thanks for the comments thus far.

    I'd like to make it clear that this article contains my thoughts and doesn't represent the views of the entire Motley Fool (hence the "Motley" in our name).

    Fool on,

    Anand

  • Report this Comment On February 03, 2012, at 12:53 AM, phexac wrote:

    I do think the financial sector in general is poised to outperform the market. I honestly do not get into the whole moral side of things. Investing is an objective game and, objectively speaking, is a good investing opportunity at this time.

  • Report this Comment On February 03, 2012, at 8:53 AM, Drbk2 wrote:

    I definitely agree with Maccdw and tybeesound. The call sign for citigroup should be changed from "C" to "G". The stock is "G"arbage, trading tens of millions of shares daily, a fit playground for day traders, but not for long term investors

  • Report this Comment On February 03, 2012, at 1:19 PM, sdcooperb100 wrote:

    Bad management trumps all other issues combined. Like BofA, Citi certainly is a standout in this category!

  • Report this Comment On February 03, 2012, at 1:25 PM, jrpan2 wrote:

    BUSINESS IS BUSINESS WITH OR WITHOUT THE "MORALITY" THE BANKS NEED TO MAKE A COMEBACK IN ORDER FOR THE REST OF THE ECONOMY TO FOLLOW SUIT.

    THAT SAID, I DO "HOPE" THEY CONDUCT BUSINESS WITH MORALITY AND THE CUSTOMERS BE WISE TO THE BUSINESS OF THE "BIG" BANKS.

    I WILL DIP MY TOE INTO C AND BAC. BUT ONLY MY "TOE"...

    HAPPY INVESTING!

  • Report this Comment On February 03, 2012, at 9:44 PM, kevkilo wrote:

    Hey, c'mon, the wrongs that Citi are guilty of have been paid for by the poor saps who were holding at $550 per share back in 2007.

    That debt has been paid.

    Now its $33; sorry for trying to make a dollar off of a bank. I'm a radical progressive liberal but I'll take a piece of it.

    go Citi go!

  • Report this Comment On February 10, 2012, at 11:48 AM, 100tradejack wrote:

    I agree that C looks good, and will probably perform over the longer term, but since you can only hold a limited number of stocks, why pick C with so many great companies out there?

    Jack

    100 TRADE JACK INC.

  • Report this Comment On February 10, 2012, at 2:26 PM, MrSFB wrote:

    I just read in today's NYT dealbook about Citi's recent "double billing" credit card scandal. http://dealbook.nytimes.com/2012/02/09/online-users-of-citib...

    I was a victim personally, and I do not believe the official story from Citi about it being a simple iPad related software error. I do not use or own an iPad, but they autodeducted money from my checking despite a zero balance! The answer can only be incompetence, corruption or both. Why put your money there when there are better casino gambling style plays to be made in the market. PS my money is being credited back to my checking (in 2-3 biz days of cours!), and they apologized for their error. NO position in Citigroup or any bank stock.

  • Report this Comment On February 10, 2012, at 3:22 PM, Violoncellist wrote:

    "Opportunity takes the form of outsize margins. In North America, Citi's net profit margin before taxes was 26% in 2011. For the rest of the world, that figure was 37%. That's almost 50% more profitable!"

    I am confused, did the author reverse the #'s? Why is 26% better than 37%?

  • Report this Comment On February 11, 2012, at 5:00 PM, DJI30K wrote:

    MF You seem to have agitated the liberals who still have no clue as to what and who was really to blame for the financial mess .Remembeer when Barny shook his finger at the world and told us not to be wasting his time because there was nothing wrong with Fannie and Freddie and as he was wagging his finger at us you could watch the ticker tape as their stock prices rose and the rest is history.The thing I find amusing and certainly amazing is that the 2 people who prevented anything being earlier were put in charge to write the Chris and Barny bill.Now talk about a joke on the american tax payer,this is it:)

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