ETF Teardown: The Best Gas 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. If investors want to capitalize on the increasing energy consumption around the world, for example, they can turn to Energy Select Sector SPDR, which invests in a mix of oil, gas, and energy stocks. But since ETFs invest in a number of companies, 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 investments in the energy sector. 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 -- Gold, for example, or Recreational Vehicles.

Selecting the Gas label in CAPS gives you a list of 88 companies that trade on American exchanges and carry this tag. This particular collection of investments has easily outrun the general market in the past year, up 18%, while the S&P 500 has dropped by 8%.

To gauge which companies the CAPS community thinks offer good opportunities in the gas sector today, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine the individual companies 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 natural gas stocks I've pulled from CAPS today:

Just a little gas
With the average gas stock sporting a four-star rank in CAPS, investors clearly embrace the macroeconomic factors driving demand for gas and petroleum products and believe demand will outstrip supply well into the future. But even within entire sectors buoyed by forces of global demand, investors want to find the best opportunity for the best price.

A solid contingent of CAPS investors thinks that VAALCO Energy is one such stock. With the stock having lost 30% of its value in the past year, some investors are looking for a smart turnaround or takeover play in the tiny explorer. The company has only a $280 million market cap, but it holds more than $70 million in cash and equivalents. The strong cash position allowed the company to institute a $20 million share repurchase plan last September.

But the exploration business is particularly risky, especially for small players. Recently, the company announced it would halt operations at a well in the North Sea when it found that the amount of gas reserves it contained was less than necessary to make it a commercial success. Still, many CAPS investors think other properties being developed and VAALCO's low traditional valuation metrics make it a compelling stock. Indeed, 1,082 of the 1,116 investors rating the company believe shares will outperform the S&P going forward.

A whole lot of gas
On the other end of the spectrum is mammoth petroleum concern, PetroChina. Exploration is only a portion of PetroChina's energy business; the company also generates billions from producing and marking oil, natural gas, and chemicals.

Shares in PetroChina soared to insane levels late last year when the company listed on the Shanghai exchange, only to come back down to earth in the ensuing months. Nearly all, 459 of 491, CAPS All-Stars rating the company see strong demand far into the future and think PetroChina will outpace the overall market.

You can lead a horse to water ...
Plucking individual stocks from the energy sector 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 small gas exploration plays are the best opportunities in energy? Or are larger, diversified gas companies still a better play? Give your own opinion in Motley Fool CAPS.