The best-known brand name isn't always the best. Yet this simple truth seems to have been lost on investors in Citigroup (C) - Get Report.

The world's most prominently branded financial institution is valued in the market as being substantially better than its peers. But some of its largest business lines -- particularly its huge credit card operation -- are lagging behind those of competitors. Citigroup didn't respond to requests for comment.

As a defense against a possible sudden switch in perceptions of Citi, some analysts and investors favor an interesting strategy: They advise staying away from the firm and investing instead in cheaper, and often more profitable, firms that do the same things.

"You can recreate Citi with separate companies with cheaper valuations," says Tom Brown, a manager of

Second Curve Capital

, a New York-based money-management firm and head of

BankStocks.com

, a Web publication dedicated to financial institutions. (Second Curve doesn't have any position in Citi stock.)

Citi of Hope

Illustrating the extra confidence in Citi's ability to turn out above-average profits, the firm's shares trade at more than 17 times 2000 earnings forecast by

First Call/Thomson Financial

, compared with 11.4 times for the

KBW Bank Index

, which tracks the nation's 24 largest banks. In addition, Citi's stock is up 67% since the beginning of 1999, while that index is down 8%.

Shining Citi
Citigroup shares rally even as most banks flounder

Source: BigCharts

But "Citi's valuation is baffling" if you look at its fundamental returns, says Jeff Miller, a manager on the

Acadia Fund

, a Villanova, Pa.-based financial-services hedge fund that has no position in Citi shares.

Investors believe that Citi is making itself invincible by exploiting its size and diversity of operations to reap cost savings and cross-selling opportunities. That said, it's asking a lot to expect Citi's weaknesses to go unnoticed forever. In this frequently schizoid market -- where stocks are loved one minute and hated the next -- it may not take much for the mindset to flip. The paeans we currently hear to Citi as the new model for global financial institutions could easily give way to vicious reminders of how Citicorp, because of its unwieldy mass, was brought to its knees in the early '90s.

Credit Where It's Due

Take Citi's North American credit card operation, the third-largest contributor to profits in 1999 and the biggest card operator in the country, with $74 billion in managed receivables. In the fourth quarter, this massive outfit made $325 million in net income, 11% higher than the year-earlier period's $275 million. Yet

MBNA

(KRB)

, a sizable credit card company with a similar focus that trades at 15 times 2000 forecast earnings, increased net profits by 34% in the same period (with no helpful one-time boosts). In its card business Citi "is getting its clock cleaned by other players," Brown says.

Then there's the mortgage banking unit at Citi, which managed to chalk up a 9% rise in net income in 1999 vs. 1998. Meanwhile, the mortgage operation at

Wells Fargo

(WFC) - Get Report

, which has a 2000 P/E ratio of 15, turned in a healthy 28% uptick in profits last year.

Even

Salomon Smith Barney

, the investment bank that contributed a whopping 24% of Citi earnings in 1999, far more than any other unit, is no stellar performer. Going by its average sequential quarterly growth rate for 1999 profits (i.e., summing the three quarter-on-quarter increases or decreases in earnings during last year then dividing by three, in an effort to avoid using meaningless comparisons with 1998 numbers), Salomon earnings were growing at a 6.32% clip for 1999, far below the 9.85% growth at

Merrill Lynch

(MER)

, which trades at 15 times forecast 2000 profits.

Citi Lights?

Second Curve's Brown readily admits that some parts of Citi are strong, but says the above-market profitability in these units is watered down by the average or subpar businesses. "A conglomerate can diversify away its excess returns," he says.

Sean Ryan, analyst at White Plains, N.Y.-based

Byrne Ryan

, a bank stock brokerage, says conglomerates have other weaknesses that may come to haunt Citi. (Byrne Ryan doesn't yet rate Citi and it doesn't do investment banking.)

Management may find it hard over time to have an impact throughout the business, he says. Even in these prosperous times, this may already be happening. Ryan wonders whether the end-1999 departure of Joseph Plumeri, Citi's head of direct sales and branch distribution, is an indication that top people are leaving because they feel they can't consistently make a big mark on Citi because of its size. Plumeri didn't return a call seeking comment.

"Conglomerates are like communism. They should work but they don't," Ryan concludes.