Cemig: Power Play in Brazil

06/03/2014 10:00 am EST

Focus: GLOBAL

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

In the past couple of years, Brazil has been hit hard by rising inflation and interest rates as the new government has come on board, notes Mark Skousen, editor of Fast Money Alert.

Cemig (CIG), formally known as Companhia Energética de Minas Gerais, is the leading integrated power utility in Brazil, servicing more than seven million users in 774 municipalities across 23 states.

This stock offers investors a great way to profit from the huge market of Brazil, where power usage is growing.

The utility is diversifying via investments in water and wind power, among other things. It also is improving its distribution and making aggressive expansion plans.

Revenues were up 4% in the past year to $6.6 billion and the company is expected to see earnings growth of 10% this year.

Cemig has a high profit margin of 21% and a return on equity (ROE) of 26%. It has strong cash flow with more than $1.4 billion in cash, which is plenty to handle its $4.3 billion debt load.

The company pays a generous dividend twice a year and just paid out a 40-cent per share dividend on May 2.

The stock is cheap by historical standards and now is selling at 50% off of its highs of 2012. It is selling for only seven times earnings. Zacks gives Cemig its top, Number One buy recommendation.

From a technical viewpoint, the stock is recovering. During late May into July, the stock has risen 90% of the time.

Now is a good window of opportunity. Let's buy Cemig at market today and set a protective stop of $6 a share. For those willing to take a greater risk, consider buying the September $7.50 call options.

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