We recently compiled a list of the 10 Best Quality Penny Stocks To Buy. In this article, we are going to take a look at where Companhia Energética de Minas Gerais – CEMIG (NYSE:CIG) stands against the other quality penny stocks.

Penny stocks are shares of small companies that usually trade for less than $5 per share. They are often found in smaller or newer businesses and tend to be more volatile and risky because they can rise or fall in value quickly.

Many penny stocks trade on smaller exchanges or over-the-counter (OTC) markets rather than major stock exchanges. While they can offer big rewards if a company grows, they also come with higher risks, as these companies may have unstable finances or less information available to investors.

Most penny stocks usually fall under the small-cap stocks category. However, that is not always the case. Some large companies with high market caps have low share prices due to several factors, even though they are well-established and stable. The most common reason is share dilution.

When a company issues a large number of shares, its share price can be low, even if the company is worth billions overall. We have some companies on our list that fall into the category. This does not necessarily mean the company is struggling or risky like typical penny stocks but the low share price is due to the way its shares are distributed rather than poor performance or instability.

Sustainable Growth Expected in Small Caps Amidst Market Shifts

On July 26, Nathan Moser, Managing Director and Senior Portfolio Manager at Impax Asset Management joined Schwab Network and discussed some long-term possibilities around small-cap stocks. He discussed the recent changes in small-cap stocks and highlighted the positive shift.

He noted that after years of struggles, the recent rise in small caps seems more sustainable, which is driven by strong inflows into ETFs and passive investment vehicles. Moser believes the market’s current move could last for years, despite some short-term volatility, and encouraged buying on any market dips.

Moser pointed out that sectors like regional banks, real estate, and housing have performed well, most likely because investors believe that the Federal Reserve may delay or avoid a recession. He said that the recent rise is just the beginning and compared it to the early stages of a baseball game, with more room for growth in the small-cap sector.

He said, “We’re in the first inning of this move, in my opinion.” However, he advised to keep focus on high-quality, profitable companies due to the risks associated with lower-quality stocks in small caps.

Our Methodology

For this article, we identified 30 quality penny stocks trading under $5, as of September 3. The stocks we identified are profitable, have real sales, and are expected to remain profitable in the future as well. We narrowed down the list to 10 stocks most widely held by institutional investors. We listed the stocks in ascending order of their hedge fund sentiment.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Companhia Energética de Minas Gerais – CEMIG (NYSE:CIG)

Stock Price as of September 3: $2.04

Number of Hedge Fund Holders: 13

Companhia Energética de Minas Gerais – CEMIG (NYSE:CIG) is a leading player in Brazil’s energy sector with a strong portfolio that spans the generation, transmission, distribution, and commercialization of electricity.

It was established in 1952 and since then, the company has expanded its reach to become one of Brazil’s largest integrated energy companies, with operations in 24 states and the Federal District. It also participates in natural gas distribution and energy efficiency through its subsidiary, Efficientia.

The company operates an extensive energy infrastructure, including 60 hydroelectric plants, 7 wind farms, and 1 photovoltaic plant. Additionally, its transmission network stretches nearly 5,000 kilometers. With stakes in 83 generation projects across 10 states, 44 of which it wholly owns, the company’s broad involvement in energy production signifies its significant role in the sector.

In Q2, Companhia Energética (NYSE:CIG) reported a 7% increase in net revenue, totaling R$9.43 billion (1 BRL = US$ 0.18 as of September 3). The company also achieved a recurring EBITDA of R$1.9 billion, marking a 2% year-over-year increase.

The growth is supported by a strong operating cash flow of R$3.45 billion for the first half of the year, which points to the company’s ability to comfortably manage its debts, fund investments, and distribute dividends. By the end of the period, it had R$2.99 billion in cash and equivalents, which supports its financial stability.

Significant investments in renewable energy are a key aspect of the company’s growth strategy. In the first half of 2024 alone, it invested R$2.45 billion, a 43.1% increase from the previous year. The commencement of operations for photovoltaic solar plants in June 2024, with the Eduardo Soares and Jusante plants approaching full commercial operation, marks a significant expansion into renewable energy sources.

Additionally, Companhia Energética’s (NYSE:CIG) Gasmig subsidiary has started the Centro-Oeste Project, which involves constructing 300 kilometers of pipeline with a budget of R$780 million. For 2024, the company plans to invest R$6.2 billion, with R$2.4 billion already allocated. The company’s investment plan for 2024-2028 includes R$35.6 billion, focusing on modernizing and maintaining the electric distribution system and other regulated investments.

The company’s strong financial performance, substantial investment in renewable energy, and ongoing infrastructure projects highlight its capacity for growth and continued success in Brazil’s energy sector.

Companhia Energética (NYSE:CIG) was held by 13 hedge funds in the second quarter and the stakes amounted to $63.51 million. Polunin Capital is the top shareholder of the company and has a position worth nearly $30 million as of Q2.

Overall CIG ranks 6th on our list of quality penny stocks to buy. While we acknowledge the potential of CIG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CIG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

Read Next: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.

Disclosure. This article is originally published at Insider Monkey.