Belo Monte: Wall Street Journal Analyst Notes High Risk in Eletrobras

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Reprint of the Wall Street Journal's Best on the Street Stock Analysts: Utilities

Marcus Sequeira earned the top spot among utilities analysts in the Best on the Street survey this year with astute calls on Latin American companies.

The analyst at Deutsche Bank AG's Deutsche Bank Securities unit covered 15 stocks during the year, but only six with American depositary receipts, or ADRs, that count toward the survey. Another hallmark of his winning portfolio: He made his calls before the year began and stuck with them.

Investors who followed Mr. Sequeira's buy recommendations for those ADRs enjoyed returns ranging from 53% to 114%. The top performer among the six was Copel, short for Brazil's Cia. Paranaense de Energia, a government-controlled utility with a large fleet of hydroelectric plants and an energy-delivery business.

Although industrial energy demand slumped last year in Brazil in response to the global recession, residential demand increased. Unlike 2008, when the utility's power production was hurt by drought, rainfall levels were good last year, helping power production.

This year, Mr. Sequeira's view of the company is less favorable, "but we still have a buy on it," he says.

While Mr. Sequeira had no sell ratings last year on the six ADRs, his hold calls on two Brazilian utilities cost him some heady gains. Electrobras, short for Centrais Eléctricas Brasileiras SA, returned 94% last year, and CPFL Energia SA returned 68%.

Mr. Sequeira, who is 40 years old and based in New York, says he was somewhat cool to Electrobras because it is a large, federally controlled utility with significant political risk and a lot of room for improvement in reducing costs and increasing overall efficiency. The stock was heavily shorted last year, he says, showing that he wasn't the only one who didn't expect a sharp rise.

He remains cool on the stock this year because of its involvement in Brazil's proposed Belo Monte hydroelectric project on the Xingu River, a tributary of the Amazon River. Rock star Sting, actress Sigourney Weaver and "Avatar" director James Cameron, among others, have protested the project, and Mr. Cameron recently threw his weight behind indigenous tribes who would be displaced by the project. In a government auction in late April, Electrobras was the main investor in the winning group, which, says Mr. Sequeira, "highlights the political risks with this stock."

CPFL, which made its initial public stock offering in 2004, both on Brazil's Bovespa exchange and on the New York Stock Exchange, benefited from talk it might acquire other companies. "But that's not something you can count on," Mr. Sequeira says, and he doesn't use that sort of speculation as a basis of investment recommendations.

Mr. Sequeira has two top picks this year: Brazil's Copel and Empresa Nacional de Electricidad SA (Chile), a subsidiary of Spanish utility Endesa SA. He thinks the Chilean company's ADRs are undervalued. The utility is considering building a large hydroelectric project called Aysen, with four big power stations, on the Baker and Pascua rivers in Chile.

The project is under environmental review and has drawn widespread opposition from environmentalists, in part because of the large reservoirs it would create, flooding thousands of acres. But Mr. Sequeira is sticking to his guns. He had a buy rating last year on the Chilean company, and it returned 53%.

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