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Friday, February 19, 2010

Citigroup (C) stock is with a positive risk/reward profile

A notice on the Fly on the Wall website from today reads that Deutsche Bank believes the risk/reward ratio on the shares of Citigroup is positive. The bank reiterated its Buy rating on the Citigroup stock with a price target set at $5.50. Deutsche Bank expects that when the government releases its shares in Citigroup there will be a renewed interest in the bank stock.

This seems logical as when you expect there is a big seller ahead you don't rush in and buy. Especially if you don't see many more big enough like you to do it. But as the time passes by, some of your competitors get in. As the chances of a complete loss of your investment become lesser, you are more willing to put some money on a positive risk/reward ratio. Which could be somewhat confusing as even a ratio of 3/1 is still positive. But the meaning of the "positive risk/reward ratio" in investing is slightly different than the maths formulas.

A positive risk/reward ratio means that the amount you are expecting to win is more than or equal to the amount you are willing to lose on a single deal. So a positive risk/reward and a price target of $5.5 means that the maximum loss Deutsche Bank sees in the Citi stock is about $2.05 (according to current prices). So basically they don't believe the stock will fall below $1.4. Which still is quite a fall. Such a big fall does not seem to be supported by the graphs of the stock though.
On the other hand this could also be interpreted as they don't expect the bank to fail as an institution and default which were the main fears which brought the price to the current levels in the midst of the crisis.

Time will tell but the fact stays that after Goldman Sachs initiated their coverage of Citi (even with a neutral rating) earlier in the month another big analyst speaks aloud about the Citi stock.

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