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 and allow investors to get in early on what they believe are tomorrow's big trends.

Investors who are bullish on gold, for example, can turn to streetTRACKS Gold Shares (NYSE: GLD  ) , or Market Vectors Gold Miners ETF (AMEX: GDX  ) . But the broad diversity of many ETFs also limits your upside -- and investors may dilute stellar returns from that one amazing company in the crowd.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments in the gold 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 quickly locate great stocks, the 5,500 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Airlines," for example, or "Multi-Level Marketing."

Selecting the “Gold“ label in CAPS gives you a list of 84 companies that trade on American exchanges. The return from this particular collection of investments has been essentially flat in the past year, much better than the 13% dip in the S&P 500.

To gauge which companies CAPS members think offer the best opportunities in the gold space today, we'll sort a sampling of these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a few companies to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are some gold stocks I've gleaned from CAPS today.

Company

CAPS
Rank
(out of 5)

Market Capitalization (in millions)

Minefinders (AMEX: MFN  )

*****

$492

Minera Andes (OTC BB: MNEAF.OB)

*****

$173

Jaguar Mining (NYSE: JAG  )

*****

$697

Barrick Gold (NYSE: ABX  )

****

$36,970

Data from Motley Fool CAPS and Capital IQ as of July 31, 2008.

Minefinders
Chihuahua is in the news again. No, this isn’t about animal rights activists protesting the use of a Chihuahua in a popular restaurant’s ads, but it is about protestors -- in this case, those who are blocking the entrance to Minefinders' Delores mine in Chihuahua, Mexico, forcing the company to reduce its gold and silver estimates for 2008. The mine has an expected lifespan of 15 years and is expected to produce millions of ounces of gold and silver. Some CAPS members hold that miners like Taseko Mines (NYSE: TGB  ) and Minefinders are worth their weight in gold, which is why 200 out of 206 members rating Minefinders are bullish on its future.

Minera Andes
Another five-star gold stock, Minera Andes, is based in the U.S. but focused on exploration in the Republic of Argentina. Results from core holes drilled during the recent exploration season indicate that the copper booty at its Los Azules mining site may be bigger than expected. Meanwhile, the San Jose silver/gold mine, which is 49% owned by Minera Andes, is now at full production, and it delivered 1,093,000 ounces of silver and 12,410 ounces of gold in the second quarter. Though the stock has dropped 44% so far this year, 87 of the 89 CAPS members rating Minera Andes believe it will outperform the market in the future.

Jaguar Mining
Jaguar Mining believes the price of its stock doesn't reflect the full value of the firm, and it has engaged in a normal course issuer bid to use some of the nearly $110 million in cash generated from an equity financing earlier this year. Jaguar is active in developing mineral resources at its 72,000-acre site in Minas Gerais and expects to double its reserves in the second quarter. Many gold-digging CAPS members think Jaguar makes sense as an investment, with 131 of the 137 members rating the company bullish about its prospects to beat the market.

Barrick Gold
The world's top gold miner, Barrick Gold, recently announced the purchase of Cadence Energy to use as a hedge against soaring energy prices. Cadence’s oil and gas production is expected to provide Barrick with approximately a quarter of annual direct oil consumption and will also help supply a significant portion of the natural gas needed in operations. Despite an imperfect operational picture, 95% of CAPS members rating the company are betting that Barrick Gold will outperform the S&P going forward.

Lead a horse to water ...
Plucking individual stocks from the gold sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. Even the best stock pickers can be horribly wrong.

Do you agree that gold still has plenty of upside? Or are precious-metal miners ready to pull up their stakes? Give your own opinion at Motley Fool CAPS.

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. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy is as good as gold.


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