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 following those big trends in emerging economies, for example, can turn to the Vanguard Emerging Markets Stock ETF (NYSE: VWO ) , which includes America Movil (NYSE: AMX ) and Petrobras (NYSE: PBR ) in its top holdings. 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 help us find the best investments in various emerging markets today. 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 -- "Department Stores," for example, or "Travel Services."
In CAPS, investors can quickly determine that there are 27 stocks in the "India" label that have collectively fallen 16.6% this past year, while the 14 stocks in the "Taiwan" label have dropped 13%. Investors can pull up similar lists for Brazil, Russia, and South Africa as well. With many stocks pulling back to more reasonable valuations around the globe, investors can then dig in to individual companies that offer great potential at a great price.
Getting down to the nitty-gritty
Here are some highly rated emerging-market stocks I've gleaned from CAPS today.
|
Company
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CAPS
Rank (out of 5)
|
Country
|
|
GigaMedia (Nasdaq: GIGM )
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*****
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Taiwan
|
|
Silicon Motion Technology (Nasdaq: SIMO )
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*****
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Taiwan
|
|
Tata Motors (NYSE: TTM )
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*****
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India
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CPFL Energia (NYSE: CPL )
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*****
|
Brazil
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GigaMedia
Online gambling was a dream business in the U.S. until the government effectively banned online gaming activities through the "Unlawful Internet Gambling Enforcement Act of 2006." But international markets, particularly Asia, still offer an immense opportunity for online gambling firms such as GigaMedia. And with the stock down nearly 40% year to date, many investors see a great opportunity to pick up an emerging giant on the cheap. GigaMedia is placing big bets in sponsoring the World Series of Poker and is investing heavily in new games. A strong majority of CAPS members think the wager will pay off; more than 98% of the 1,855 members rating the firm believe it will beat the S&P.
Silicon Motion Technology
Like all semiconductor companies, multimedia chip specialist Silicon Motion Technology rides all the ups and downs of global chip cycles. Right now is definitely one of those "down" times, as the stock has plummeted nearly 60% year to date. Second-quarter results were abysmal, with revenue and earnings coming in well below expectations. The company also slashed its full-year GAAP earnings forecast to about one-third the level previously expected. The company has faith, though, and has instituted another $40 million buyback plan after completing $40 million in buybacks already. Most CAPS members rating Silicon Motion see it as a great call at this price, too; more than 98% of the 660 members rating the company are bullish.
Tata Motors
Indian auto manufacturer Tata Motors has been in neutral -- or make that reverse – lately; the stock has been spinning lower, to the tune of nearly 50% so far in 2008. The company recently fell from favor in the CAPS community as investors fretted over the purchase of Ford's Jaguar and Land Rover lines, as well as increased raw-material costs biting into profits. But Tata has regained five-star status once again, and nearly 97% of the 2,248 members rating the company see it as poised to pop higher from here.
CPFL Energia
Bucking the "plunging shares" trend of our other emerging stocks, Brazilian electricity provider CPFL has actually gained traction this year as the firm capitalizes on its effective monopoly and scale to drive impressive profit growth. With a fragmented power-distribution market in Brazil, there's lots of potential growth ahead, and CAPS members think CPFL is in the driver's seat. Indeed, a near-unanimous 523 of the 529 members rating the company see it outperforming the market.
Lead a horse to water ...
Plucking individual stocks from emerging markets is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than taking a recommendation. Even the best stock pickers can be horribly wrong.
Do you agree that many emerging-market technology players are poised to rebound? Or is energy in developing nations still the best play? Give your own opinion at Motley Fool CAPS.
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