CIA ENERGETICA DE-SPON ADR (NYSE:CIG) Fits Peter Lynch's GARP Strategy with Strong Growth and Undervalued PEG

In the world of long-term investing, few strategies have shown as much staying power as the approach supported by Peter Lynch. His method, detailed in his important work One Up on Wall Street, centers on finding companies with lasting growth paths trading at fair prices, a philosophy often called Growth at a Reasonable Price (GARP). Lynch highlighted fundamental health, controlled debt, good profitability, and a PEG ratio under 1 as main signs of a good investment. This method avoids speculative high-growth companies for businesses that mix expansion with financial steadiness, making it especially interesting for investors looking for lasting returns without paying too much for growth.

One company now meeting many of Lynch’s standards is CIA ENERGETICA DE-SPON ADR (NYSE:CIG), a Brazilian utility company involved in electricity generation, transmission, and distribution, mainly in the state of Minas Gerais. With operations across many energy-related areas, CIG represents the kind of “boring” but needed business Lynch usually liked, understandable, necessary, and set in a steady industry.

A closer look at CIG’s fundamentals shows why it is notable under Lynch’s model:

• Good Historical EPS Growth: Lynch looked for companies with a confirmed history of earnings increase, ideally from 15% to 30% each year to confirm sustainability. CIG’s five-year EPS growth of 26.37% fits right in this range, pointing to a healthy and steady rise in profitability.
• Appealing PEG Ratio: Key to Lynch’s method is the PEG ratio, which changes the P/E ratio for growth and helps find undervalued growth stocks. With a PEG of only 0.18, far under Lynch’s limit of 1, CIG seems notably undervalued compared to its historical growth, indicating a market mispricing that long-term investors could use.
• Strong Profitability Metrics: Lynch gave high importance to return on equity (ROE) as a gauge of efficient capital use. CIG’s ROE of 25.09% not only goes beyond Lynch’s 15% minimum but also places it with the best in the electric utilities field, showing high profitability and good management.
• Sound Financial Health: To avoid companies with too much debt, Lynch preferred firms with a debt-to-equity ratio under 0.6, and preferably below 0.25. CIG’s ratio of 0.46 shows a balanced capital structure, with controlled debt levels that offer options without adding too much risk. Also, its current ratio of 1.06 meets Lynch’s liquidity need, showing an ability to meet short-term debts easily.

Beyond these number-based screens, CIG shows other traits Lynch appreciated, including a fair dividend yield and a long history in a steady sector. These parts fit with his focus on investing in well-set, cash-producing businesses instead of speculative projects.

From a wider fundamental view, CIG’s detailed analysis shows a mixed but mostly positive profile. The company gets a 6 out of 10 in our rating system, with high performance in profitability and valuation. It places well in its field for return on assets, return on invested capital, and margin efficiency, though it has some worries in dividend sustainability and future earnings growth expectations. Importantly, analysts expect a drop in EPS in the next few years, which needs notice, though Lynch might say that short-term predictions are less important than long-term business quality and valuation.

Investors curious about other companies that fit with Peter Lynch’s ideas can find a chosen selection using our predefined stock screener, which filters for earnings growth, PEG ratios, financial health, and profitability measures consistent with this strategy.

While CIG presents an interesting case for GARP investors, it is important to recall that all investments have risks, including exposure to local economic situations, currency changes, and field-specific issues. Complete due diligence and a long-term view are needed when judging any possible addition to a portfolio.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult with a qualified financial advisor before making investment decisions.