Yesterday we posted the worst Brazilian stocks of 2011, so now it’s time to write about the best ones. After all, this blog’s motto is “we don’t care for the bull side or the bear side – only the right side“. 

A quick glance over Brazil’s stock market may have given the false impression that everyone who invested in Brazilian stocks lost money in 2011. Yes, it is true that Bovespa (EWZ index for US-based investors) melted down 20% this year, but some wise investors may have found specific companies with low P/E and/or high free cash flow. For instance, among Bovespa’s 100 highest-liquid stocks, we found at least 10 companies that are up by 25% or more between January 1 and November 14. So here we present our “Favorite Fives”, of which three are listed as ADRs.

Brasil Foods (NYSE: BRFS)

Performance: +27%

Our comments: At some point this year, the market thought that CADE would block the takeover of Sadia by Perdigao (which eventually became Brasil Foods). The regulator added terms and conditions that were not favorable to Brasil Foods (like asking the company to get rid of factories, brands and entire supply chains to ensure proper competition in certain segments of the market). In exchange, however, the company got the green light to execute the merger and become a Brazilian giant in the food industry. The delay in Cade’s decision allowed the company to plan the integration in detail, cutting off redundancies and overhead, which ended up in the form of strong earnings.

TIM (NYSE: TSU) 

Performance: +26%

Our comments: Another company that has brought only joy to investors this year was TIM. The company has benefited from the strong consumer demand for cell phones. Excellent corporate governance compliance also helped. TIM has been growing cash flow, billings and customer base. The company stopped losing market share to competitors by investing in an aggressive pricing strategy to steal customers from rivals.
Souza Cruz 

Performance: +26%

Our comments: The main reason for the strong performance is the characteristic of the stock itself, defined as defensive. The company pays good dividend and has a more conservative profile, which is good in times of turbulence like these

Cemig (NYSE: CIG)

Performance: +15% ytd

Our comments: Thisstate-controlled electricity utility company pleased the market after refusing to cut dividendsfollowing the acquisition of a stake in Norte Energia SA. The companies may pay dividends equivalent to 50 percent oftheir net income this year.

Telefonica 

Performance: +33% ytd

Our case: In addition to its solid cash flow, Telefonica Brazil showed evidence of good corporate governance. The company this year completed the acquisition of Vivo Telesp, and has been executing the merger very well. 
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