ETF Teardown: China's Top Stocks

Noted for their simplicity, ease, and flexibility compared to mutual funds, exchange-traded funds have become a popular investing tool. ETFs hold a collection of stocks that share certain elements in common. For example, if investors want to capitalize on the booming economy in China, they can turn to iShares FTSE/Xinhua China 25 Index or PowerShares Golden Dragon Halter, which track two different Chinese stock indexes.

These ETFs invest in a number of stocks, but their broad diversity also limits your upside. For an investor who's, say, really hip to medical companies in the region, but cold on the future prospects of Chinese communications stocks, these ETFs wouldn't fit the bill.

Fear not, Fool. In this edition of "ETF Teardown," we'll drill into the best stocks China 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, the more than 5,200 stocks rated on CAPS can each be "tagged" with descriptors that group the company with others sharing certain qualities -- "solar power," for example, or "Brazil."

Selecting the "China" tag in CAPS brings up 114 Chinese investments that trade on American exchanges. This particular collection of investments has done well in the past year, up 28% versus the S&P 500's gain of just 2.3%.

To gauge which companies the CAPS community thinks are China's best opportunities today, we can sort this list by star ranking. CAPS investors' collective opinions award each stock a rating from one to five stars, with five being the best. We can also see exactly who -- from Wall Street to Main Street -- is bullish or bearish on each company, and why.

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

Company

CAPS Rank

Industry

China Medical Technologies (Nasdaq: CMED  )

*****

Medical Instruments and Supplies

American Oriental Bioengineering (NYSE: AOB  )

****

Biotechnology

KongZhong (Nasdaq: KONG  )

****

Wireless Services

China Life Insurance (NYSE: LFC  )

****

Insurance

Qiao Xing Universal Telephone (Nasdaq: XING  )

***

Communication Equipment

Baidu.com (Nasdaq: BIDU  )

***

Internet Search

Eastern medicine
Looking at our list this week, the Chinese stock our CAPS community favors most is medical diagnostics firm China Medical. While many diagnostic companies -- such as Abbott and GE Health care (a division of General Electric (NYSE: GE  ) -- build dozens of products that encompass a broad spectrum of technologies for disease detection, China Medical is focused on only a few of the highest growth markets.

In its most recent quarter, more than half its revenue came from its immunoassay platform, which grew 85% compared to last year. About 80% of this was recurring revenue from reagent kits sold to customers that have the China Medical system installed. The company is developing and shipping additional tests for fertility and thyroid disorders for the platform as well, which management believes will keep growth in this segment in high gear. Reagent sales also tend to have very high margins, generating lots of cash for the business to reinvest.

In addition to its diagnostic platforms, China Medical makes high-intensity focused ultrasound (HIFU) tumor therapy systems that treat cancerous tumors. The company recently received approval to market the system in Korea for the treatment of liver cancer, pancreatic cancer and uterine fibroids. It also has clinical trials under way in the U.S. for the system. The combination of high growth with new and innovative platforms on the way has more than 96% of CAPS investors who rated the stock giving it a bullish rating to beat the market going forward.

Universal reversal
A company further down on the list but still courting substantial favor from investors is telecom equipment manufacturer Qiao Xing Universal Telephone. Once hinted at as thenext Nokia, the company nonetheless disappointed investors after it announced significant earnings restatements in July 2007. Class action lawyers have since pounced on the company. Overall, the stock is down more than 30% year to date. While investors still debate whether Qiao Xing is a solid company available on the cheap or a fraud, bulls outnumber bears in CAPS by a margin of nearly 17-to-1.

You can lead a horse to water ...
Plucking individual stocks from an emerging market such as China is always risky. Investors should perform their own due diligence on companies, rather than blindly taking anyone else's recommendation. After all, even the best stock pickers can guess horribly wrong sometimes.

Do you agree that medical and biotech are the best places to be in China? Or are Chinese communications companies a better play? Give your opinion in Motley Fool CAPS.


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