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 (NYS: 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 (NYS: 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 (NYS: WFC) , JPMorgan (NYS: 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.

At the time thisarticle was published Anand Chokkaveluowns 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 serviceshave recommended buying shares of Goldman Sachs. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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