ETF Teardown: Mexico's Best Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements in common, so if investors want to capitalize on the booming sectors of the economy in Mexico, for example, they can turn to iShares MSCI Mexico Index (AMEX:EWW), which contains Mexican stocks covering industries including industrial materials, financial services, and telecommunications.

But since this ETF invests in a number of stocks, it gives you a broad diversity that also limits your upside. For an investor who was, say, really hip to Mexican telecommunications companies but cold on the future prospects of consumer goods stocks, this ETF wouldn't fit the bill.

Fear not, amigo. In this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what Mexico has to offer. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors quickly locate great stocks, any of the 4,300 rated stocks profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting the "Mexico" tag in CAPS presents a list of more than 20 Mexican investments -- one of them being the iShares MSCI Mexico Index -- that trade on American exchanges. This particular collection of investments has done well in the past year, up 65% versus the S&P gain of only 13%.

To get a sense of which companies the CAPS community thinks are the best opportunities in Mexico today, we can sort this list by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here are a few of the five-star stocks our screen pulled up today.

In looking at what the CAPS community favors in Mexico, telecommunications stands out as an industry that has shown tremendous growth in the past and good promise in the future. America Movil and Telefonos de Mexico have both pummeled the market in the past three years, showing 404% and 161% gains, respectively, vs. the S&P's 40%. While the market for wireless and wireline services in Mexico is largely saturated, other Latin American markets are still early in their growth phases. Additionally, new services such as broadband access and corporate data services are growing rapidly in the region.

Investors ranking Telefonos de Mexico in CAPS cite the company's monopoly position in Mexico, as well as its interest in emerging South American markets such as Brazil as key reasons to give the company the thumbs up. In fact, all 40 of the all-star CAPS players rating the company predict it will beat the S&P going forward. CAPS players are also overwhelmingly bullish on the prospects of America Movil, with bulls outnumbering bears by a margin of more than 50-to-1.

Even core industries that aren't growing quite as rapidly as telecommunications in Latin America show strong support from the CAPS community. Cement provider Cemex, home developer Homex, and even tortilla maker Gruma all get five-star ratings. Economic growth in Mexico and initiatives by the government to induce affordable mortgages to citizens has led to a boom in demand for housing and construction, and the products that support these areas such as cement and other building materials.

And while Gruma's tortilla business may not excite everyone, a low P/E of 11.5 and a 2.3% dividend yield has CAPS investors cheering. Both Cemex and Homex are favored by more than 40-to-1 by CAPS investors rating the companies, and Gruma has all 46 All-Stars giving the company a bullish vote.

You can lead a horse to water ...
Plucking individual stocks from an emerging market such as Mexico is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. After all, even the best stock pickers can be horribly wrong on a stock.

So, do you agree that telecom is still the best place to be in Mexico? Or are consumer goods companies a better play? Give your own opinion in Motley Fool CAPS.

Motley Fool Global Gains is yet another resource the Fool offers to help you find some of the greatest investment opportunities beyond our borders. Check out our new international-investing service free for 30 days.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. Cemex is a Stock Advisor recommendation. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.