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Wednesday, August 7, 2013 - 14:30
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Wednesday, August 7, 2013 - 14:30

A Rare Opportunity To Own One Of Our Top 'Forever' Stocks While It's 'Hated'

Wednesday, August 07, 2013 2:30 PM

Here at StreetAuthority, we love companies that have a wide moat around their operations and possess powerful long-term growth characteristics.

Investing in these companies is often quite simple. You buy shares -- and put them on the shelf. Year after year, they appreciate in value. Over the course of many decades, they deliver substantial investment returns. We call these "Forever Stocks."

Yet the ride isn't always quite so smooth for some "Forever Stocks." Even companies like GE (NYSE: GE) or IBM (NYSE: IBM) hit a rough patch, temporarily falling deeply out of favor with investors. And when that happens, savvy investors know to pounce, buying shares at marked-down prices.

Such an opportunity exists now with a company headquartered 5,000 miles south of the New York Stock Exchange. Brazil's CPFL Energia (NYSE: CPL) is a very good company having a very bad year. Shares are far from their recent highs, though as the dust settles, look for this stock to rotate back into favor.

Brazil's largest electric utility, CFPL was forced by the Brazilian government to roll back its rates in 2012 in an effort to lower consumer prices. Investors were none too pleased, as it became immediately apparent that the company's dividend couldn't be sustained: A $1.37 a share payout in 2011 had shrunk to $1 in 2012. This year, the dividend will likely be 80 to 90 cents a share. Yet that should mark a bottom, and in coming years, powerful demographic trends should help CFPL to again become a robust dividend grower.

Power To The People
Although the Brazilian economy is undergoing growing pains as it transitions from an emerging economy into a developed economy, the long-term trend of an expanding middle class implies an ongoing need: more power to run refrigerators, air conditioners, washing machines, TV sets and other appliances bought by folks who only recently developed the spending power to buy such goods.

And CFPL has been at the forefront of that trend. The utility's sales base has grown from $3 billion in 2004 more than $6.5 billion today. More importantly, the demographic trend is far from played out.

Just as we saw here in the U.S. in the 1950s, a rising middle class creates a new wave of spending on goods and services that generates a further employment expansion. We saw that in Japan in the 1960s and '70s and in South Korea in the '80s and '90s -- and we're now only part of that way through that process in Brazil. Though the Brazilian economy is currently the seventh-largest in the world, it is likely to crack the top five by 2030.

By CFPL's own estimates, Brazil's power needs will grow at least 5% annually through 2019. That may not seem like much, but it's a 40% increase from 2012 levels. (To put that in context, total electric power demand in the U.S. has risen less than 10% over the past decade.) The Brazilian government agrees, and its Ministry of Mines recently approved a 10-year power generation expansion plan that will deliver an additional 167 gigawatts to the Brazilian grid.

The Currency Kicker
Unlike U.S.-based "Forever Stocks," an investment in CFPL has an added wrinkle. Investors are exposed to currency movements, which can impinge or magnify stock price gains. Lately, it's been an impingement.

Since the summer of 2011, the Brazilian real has lost more than 30% of its value against the U.S. dollar, which has had a direct negative impact on Brazilian share prices as they are converted back into dollars. This currency could fall further in the near term, but long-term trade flows suggest it is already becoming quite undervalued, and the stage is set for an eventual rebound in the real. That would provide a tailwind to CFPL's shares (and its dividend) as well.

Risks to Consider: The majority of Brazil's electricity is derived from hydroelectric power, and a drought in the country would put a severe strain on the nation's utilities.

Action to Take --> CFPL Energia reports second-quarter results Aug. 8. At that point, management is likely to focus on the state of the current dividend as well as potential future growth for the payout. Though this stock has fallen by more than a third over the past 18 months, its current dividend yield, in the 5% range, along with dynamic growth prospects, should help this stock to move back into favor in the quarters ahead.

P.S. -- CPFL Energia isn't the only "Forever" stock I've got my eye on. My colleague Elliott Gue and his staff recently went looking for the absolute best stocks on the market -- those stocks good enough to buy, forget about and hold "Forever." After six months and $1.3 milllion worth of research, the team was successful. To learn more about the "Forever" stocks they uncovered -- including some names and ticker symbols -- click here.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.