ETF Teardown: The Best Gold 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 rising popularity of gold, for example, they can turn to Market Vectors Gold Miners, which invests in gold and silver mining stocks.

This ETF gives investors a broad diversity, but it also limits upside. For an investor who is bullish on the continued rise in gold prices and wants to avoid hedged miners, this ETF wouldn't fit the bill.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what the gold sector 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 5,200 rated stocks that have been profiled in CAPS can be "tagged" with a descriptor that groups the company with others sharing a certain quality.

Selecting the "Gold" tag in CAPS presents a list of 77 gold-related investments that trade on American exchanges. To get a sense of which companies the CAPS community thinks are the best opportunities in gold today -- and which they recommend staying away from -- 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 stocks our screen pulled up today.

Company

CAPS Rank

Operations Located In:

Kinross Gold (NYSE: KGC  )

*****

Brazil, Canada, Chile, Russia, U.S.

Gold Fields (NYSE: GFI  )

*****

Australia, Congo, Ghana, Peru, South Africa

Barrick Gold (NYSE: ABX  )

****

Africa, Australia, North America, South America

GoldCorp (NYSE: GG  )

****

Argentina, Australia, Brazil, Canada, Chile, Mexico, U.S.

Newmont Mining (NYSE: NEM  )

****

Australia, Bolivia, Ghana, Indonesia, Mexico, New Zealand, Peru

Rio Tinto (NYSE: RTP  )

****

Asia, Australia, Europe, New Zealand, North America

Crystallex International (AMEX: KRY  )

***

Venezuela

Canadian gold miner Kinross Gold is one company receiving five gold stars from the CAPS community of investors. While the macro trends of higher metal prices has certainly helped drive momentum in gold-mining stocks -- and greater than 25% annual revenue growth at Kinross in the past several years -- many investors cite improving efficiency in the company's mining properties as reason to be bullish.

Some of the luster came off in its most recent earnings report, however. Kinross reported higher costs in the quarter and eased its production target for 2007 slightly from 1.65 million ounces to 1.6 million ounces. With shares having risen nearly 40% in the past three months, the stock was already a bit pricy and had likely been propped up by some investors' expectations of a takeover, since consolidation in the gold-mining sector has been brisk. Still, 378 out of the 392 investors rating Kinross in CAPS believe it will outpace the S&P going forward.

Another popular gold digger, Newmont Mining, is in the early stages of a turnaround, with once-CFO Richard O'Brien having filled the CEO shoes since July. Many changes aimed at improving the company have already taken place, including a removal of the hedges on future gold sales and the disposal of non-core assets. With the company reporting significant drops in production at a few of its mines earlier this year, it's also making efforts to stabilize and grow output, including a 24% premium bid for Canada's Miramar Mining.

Investors so far have welcomed the changes at Newmont -- the stock has gone up more than 20% in the past few months. But significant challenges remain for Newmont, many of which will take time to resolve. Some are more directly under the control of the company, such as resolving production issues at its Phoenix mine in Nevada. But other less controllable issues -- such as rising fuel and consumable prices -- have driven up costs that also tax Newmont's earnings. CAPS investors remain largely bullish about Newmont's prospects, particularly now that gold sales are no longer hedged. In fact, more than 93% of the CAPS All-Stars rating the company believe that it will outperform the general market.

You can lead a horse to water ...
Plucking individual stocks from a sector such as gold 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.

Given that, though, do you agree that a simple gold index is the best place to invest? Or are unhedged gold miners a better play? Give your own opinion in Motley Fool CAPS.


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