Bet on Brazilian utilities

"Some overseas utilities offer excellent growth potential while throwing off moderate income," says Stephen Leeb in Income Performance Letter. Here's a look at Brazilian utes.

"We particularly favor two companies in Brazil. The economy appears to be on the mend from the global financial crisis and should be expanding at a 5% pace again by 2010.

"Brazil derives much of its strength from its diverse resource base. Rising oil production and reliance on ethanol from sugar cane to power its vehicles have made Brazil largely energy independent.

"Materials such as iron ore, manganese, bauxite and nickel top the list of Brazilian exports, along with agriculture products. In fact, China has replaced the U.S. as the country's top trading partner, fueled by China's voracious appetite for raw materials.

"Brazil's prosperity is translating into greater consumption of electricity and water. Two major beneficiaries are our Growth & Income portfolio oldings CPFL Energia (NYSE: CPL) and Companhia de Saneamento Basico do Estado de Sao Paulo (NYSE: SBS), known as SABESP for short.

"CPFL is Brazil's largest non-government power supplier with 6 million customers in the states of Sao Paulo and Rio Grande do Sul. SABESP provides water and sewage services to residential, commercial, industrial, and governmental customers in 366 municipalities in Sao Paulo.

"Both stocks are cheap, with SABESP and CPFL trading at five and 11 times next year's expected earnings respectively. "They're also attractive as a currency play, as the weak U.S. dollar translates into added gains over the long haul.

"Yet SABESP should grow far faster than its American counterparts. CPFL has trailed its utility peers so far this year, but we expect it to play catch up. Plus, the stock yields 7.1%, and the dividend should continue to grow. Both fast-growing Brazilian utilities are rated buys."