ETF Teardown: Brazil's Top Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. Investors captivated by the booming economy in Brazil can buy into the iShares MSCI Brazil Index ETF, which contains more than 50 Brazilian stocks in industries such as energy, telecommunications, and consumer goods. But since this ETF invests in a number of stocks, its broad diversity also limits your upside.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what Brazil 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 locate great stocks quickly, CAPS-rated stocks can be "tagged" with descriptors that group the company with others in the same category -- biofuels, for example, or Russia.

Selecting the Brazil label in CAPS gives you a list of 28 companies that trade on American exchanges and carry this tag. This particular collection of investments has outrun the general market in the past year, up 44% versus the S&P's gain of only 4%.

To gauge which companies the CAPS community thinks offer the best opportunities in Brazil today, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine each individual company to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some Brazilian stocks I've gleaned from CAPS today.

Viva communication!
The doubling of several hot wireless stocks in 2007 leaves no doubt that the wireless-communications sector is booming in emerging markets around the world. Vivo Participacoes, the largest cellular-services provider in Brazil, offers a smorgasbord of services on both the GSM and CDMA technology platforms. Portugal Telecom (NYSE: PT) and Spain's wireless giant, Telefonica (NYSE: TEF), jointly own nearly 90% of the common shares.

With stiff competition in Brazil coming from America Movil's (NYSE: AMX) Claro brand, Vivo has been investing heavily in expanding its network. The company has recently acquired additional licenses to fill out nationwide coverage and was also awarded licenses in third-generation (3G) frequencies for advanced wireless services. The company credits the overlay of GSM technology onto its network for much of its recent success, and with good reason -- it has more than 6.7 million GSM subscriptions as of September 2007.

The company has also been reducing its debt load and expanding margins. With lots of growth still ahead in Brazil's market for cellular services, CAPS investors are largely bullish on Vivo. Many like the progress the company has made in overhauling its business and network to compete more effectively. Today, more than 97% of investors rating the company believe that it will outperform the market in the future.

Big Brazilian oil
Of course, commodity businesses tend to do exceptionally well as large nations such as Brazil develop, with Big Oil being no small exception. Petroleo Brasileiro, or PetroBras, absolutely dominates the Brazilian retail market, thanks to its effective monopoly over exploration, refining, and production assets in the nation.

The company also holds rights to extensive oil and gas reserves around the world, so finding oil is definitely not an issue. And since PetroBras is considered a leader in deep-water drilling as well, no find is too tough for the company to capitalize. Back in mid-August, PetroBras shares were trading at half the level they are today. But increased optimism and a massive new discovery at the Tupi oil field has put a cheap valuation in the past. Today, PetroBras trades at a more inflated earnings multiple of 20.

Even so, CAPS investors still hold an overwhelmingly bullish stance on PetroBras, with only 12 out of the 1,042 raters being brave enough to predict market underperformance going forward. These few investors generally think the stock has gone too far too quickly and is due for a pullback. But many more bullish investors think the company's proven reserves will help it win big in the long run.

Lead a horse to water ...
Plucking individual stocks from Brazil 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.

Do you agree that wireless communications offer the best prospects in Brazil? Or is oil and gas still the better play? Give your opinion in Motley Fool CAPS.