CIA ENERGETICA DE-SPON ADR (NYSE:CIG): A GARP Investment Meeting Peter Lynch's Criteria

Investors looking for long-term growth opportunities at reasonable prices often use methods that combine fundamental strength with sustainable expansion. One such method is the GARP (Growth At a Reasonable Price) strategy, which has much in common with the principles famously used by Peter Lynch while he managed the Magellan Fund. This strategy aims to find companies that show consistent earnings growth, but whose shares are not overpriced by the market. The objective is to steer clear of the extremes of speculative high-growth stocks and stagnant deep-value investments, instead focusing on businesses that provide a good balance between growth potential and valuation safety.

Companhia Energética de Minas Gerais SA (NYSE:CIG), or CIG, is a Brazilian utility company that recently appeared in a screen based on Peter Lynch's investment criteria. As a provider of essential electricity generation, transmission, and distribution services, mainly in the state of Minas Gerais, CIG works in a stable and easy-to-understand sector, exactly the kind of "dull" business Lynch frequently liked. The company's fundamental profile suggests it deserves further examination from investors who follow the GARP philosophy.

Meeting the Lynch Criteria

The screen used specific filters inspired by Lynch's rules to find companies with strong, but not extreme, growth and good financial health. CIG seems to satisfy these important criteria based on the available data:

• Sustainable Earnings Growth: Lynch wanted companies with a 5-year earnings per share (EPS) growth between 15% and 30% to avoid unsustainable rapid growth. CIG's EPS has increased at an average yearly rate of 26.37% over the past five years, placing it well within this target range and indicating a solid historical record of profitability.
• Reasonable Valuation (PEG Ratio): A key part of the strategy is the PEG ratio (Price/Earnings to Growth), which Lynch liked to be at or below 1.0. This measure adjusts the standard P/E ratio for growth, helping to spot stocks that might be undervalued considering their growth path. CIG's PEG ratio of about 0.18 is much lower than the threshold, implying the market may be underpricing its historical growth.
• Strong Profitability (ROE): Return on Equity (ROE) shows how effectively a company produces profits from shareholder equity. Lynch searched for an ROE above 15%. CIG's ROE of 25.09% is strong, pointing to high profitability and effective use of investor money.
• Solid Financial Health (Debt/Equity and Current Ratio): To confirm stability, Lynch preferred companies with a Debt-to-Equity ratio below 0.6 (and preferably below 0.25). CIG's ratio of 0.46 shows a good mix of debt and equity financing. Also, its Current Ratio of 1.06 indicates it has enough short-term assets to meet its short-term obligations, offering a buffer against operational issues.

Fundamental Report Summary

A thorough fundamental analysis of CIG gives it an overall score of 6 out of 10. The report points out several positive aspects that fit a GARP investment thesis. The company scores well on profitability, with high returns on assets, equity, and invested capital that beat most of its competitors in the electric utilities industry. Its valuation is a notable feature, with low P/E and Price-to-Free-Cash-Flow ratios that suggest a low price relative to both the industry and the wider S&P 500.

However, the analysis also mentions points to think about. While past growth has been solid, future earnings are expected to decrease, which differs greatly from its historical record and is an important element for investors to watch. The company's dividend, while having a consistent history, may not be completely secure at its current payout ratio. Financially, the company is mostly in good shape, although there has been a recent rise in debt compared to assets.

Investment Considerations

For the long-term investor, CIG offers a good example of a profitable company in an essential industry trading at a large discount. The very low PEG ratio suggests that if the company can stabilize or get back to a more average growth rate, the current price could be an appealing entry point. The Lynch-based screen successfully finds these kinds of opportunities by concentrating on the relationship between growth, profitability, and price. The following fundamental review supports the initial screening findings while adding important details, like the expected earnings challenges.

This mix of quantitative screening and qualitative examination is key to a systematic GARP method. It lets investors methodically locate potential candidates and then perform the required due diligence to grasp the fundamental business situation.

Discover More Potential Investments

CIG was found using a particular group of filters made to imitate Peter Lynch's strategy. If this method fits your investment objectives, you can view the complete screen and explore other companies that currently meet these criteria.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.