CIA ENERGETICA DE-SPON ADR (NYSE:CIG): A Peter Lynch-Style GARP Investment Opportunity

Peter Lynch’s investment strategy, described in One Up on Wall Street, centers on finding companies with steady growth at fair prices. His method combines growth and value investing, focusing on key financial measures like earnings growth, profitability, and financial stability. The aim is to identify businesses capable of providing reliable returns over time without paying too much for their growth prospects.

One stock that recently appeared in a Peter Lynch-style screen is Companhia Energética de Minas Gerais SA (NYSE:CIG), a Brazilian utility company involved in electricity generation, transmission, and distribution, along with gas distribution and energy services. The stock aligns with multiple criteria from Lynch’s strategy, positioning it as a possible choice for investors looking for growth at a fair price (GARP).

Why CIG Matches the Peter Lynch Criteria

1. Consistent Earnings Growth
   Lynch preferred companies with stable, moderate earnings growth, usually between 15% and 30% per year. CIG’s five-year EPS growth is 26.37%, fitting this range. Although recent earnings have declined (-11.63% YoY), the long-term trend stays positive. Still, investors should watch whether the company can maintain this growth given economic and regulatory hurdles in Brazil.

2. Fair Valuation (PEG Ratio ≤ 1)
   A key part of Lynch’s approach is the PEG ratio, which accounts for growth when evaluating the P/E ratio. A PEG below 1 implies a stock might be undervalued compared to its growth potential. CIG’s PEG ratio of 0.16 is very low, suggesting the market may be underestimating its growth prospects.

3. High Profitability (ROE > 15%)
   Return on equity (ROE) shows how well a company generates profits from shareholder equity. CIG’s ROE of 25.09% ranks it among the best in its industry, beating 95.74% of competitors. This strong profitability matches Lynch’s preference for firms that deliver solid returns without excessive debt.

4. Sound Financial Health (Debt/Equity < 0.6, Current Ratio ≥ 1)
   Lynch avoided companies with heavy debt, favoring those with manageable leverage. CIG’s debt-to-equity ratio of 0.46 is below the 0.6 threshold, and its current ratio of 1.06 shows enough liquidity to meet short-term needs. These figures point to a stable financial position, lowering risk for long-term investors.

Fundamental Analysis Summary

Our fundamental report gives CIG a score of 6 out of 10, indicating a balanced but mostly positive view:

• Valuation: CIG trades at a P/E of 4.15, much lower than the industry average (15.08) and the S&P 500 (26.54).
• Profitability: Strong ROE and better margins balance weaker gross margins.
• Dividends: A 3.29% yield with a history of growth, though the high payout ratio (61.32%) raises questions about sustainability.
• Risks: Falling short-term earnings forecasts (-25.52%) and a high Altman-Z score (1.80) hint at possible financial strain, though the latter still beats 82.98% of peers.

Final Thoughts

While CIG displays many qualities Lynch valued—solid past growth, fair pricing, and high profitability—investors should consider near-term challenges, including earnings drops and regulatory issues in Brazil’s utility industry.

For those curious about more Peter Lynch-inspired investment options, our stock screener offers more screened results based on the same criteria.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before making investment decisions.