ETF Teardown: India's Best 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 following those big trends in India, for example, can turn to the PowerShares India ETF, which includes WiPro (NYSE:WIT) and Reliance 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 drill into the best investments in India. 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 -- "Clothing," for example, or "Office Supplies."

Selecting the "India" label in CAPS gives you a list of 27 companies that trade on American exchanges. This particular collection of investments has fallen even farther than the broader market in the past year, down 22.6%, while the S&P 500 has dipped by 15.1%.

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

Tata Motors
Even with the prospect of lifting 465 million Indians from poverty by manufacturing the world's cheapest car, Tata Motors hasn't been able to defeat opposition to its Nano plant. Combined with other challenges facing Tata today, farmers who oppose the development continue to place production of the car at risk. If some 60 key suppliers can't be located close to Tata's factory, the company contends that it may not be able to maintain prices and schedules

Nevertheless, lacking a Toyota (NYSE:TM) or General Motors (NYSE:GM) response to the Nano and its sub-$2,500 price tag, investors believe Tata's in a strong position. Nearly 97% of the 2,268 CAPS members rating Tata expect the company to outperform the broader market going forward.

Cognizant Technology Solutions
Cognizant shares have fallen 20% for the year, even though the IT services firm reported second-quarter profits that rose 26%. A reduced forward outlook citing a weak financial sector, which accounts for 45% of Cognizant's revenue, didn't help, either. But despite that gloomy forecast, some predict that the company's lower share price may provide a golden opportunity for long-term investment, since Cognizant claims to be growing faster than its competitors. A strong contingent on CAPS likes the underlying fundamentals, and 781 of the 810 members rating Cognizant believe that it will outperform the S&P.

Satyam Computer Services
While Indian companies have seemed to offer little excitement lately, profitable growth stocks like Satyam have still performed strongly over the long term. Shares in the leading IT services firm climbed as much as 12% from the beginning of this year through May, only to fall back to trade near their 52-week low today. The uncertainty surrounding corporate spending in a rough economic climate has many investors unsure of how to view services firms such as Satyam.

But the company's strong core technical competency, and its forward earnings multiple of 12.5 -- below the projected long-term growth of 16% -- have many CAPS members bullish. More than 98% of 961 CAPS members rating Satyam believe the company will beat the broader market.

Sterlite Industries
Metals and mining player Sterlite Industries will soon get a facelift. As a subsidiary of Vedanta Resources, the company will be involved in a complex restructuring that will swap shares among several companies in the group. The move is aimed to make the company a more dynamic metals player, and further capitalize on demand for major commodities like aluminum, copper and zinc. With the diversified metals player buoyed by rising commodity prices, a strong 98% of the 978 CAPS members rating Sterlite believe the company will beat the market going forward.

Lead a horse to water ...
A Foolish caveat: Plucking individual stocks from India is a high-risk endeavor. Investors should always perform their own due diligence on companies, rather than simply taking anyone else's recommendation. Remember, Fools, even the best stock pickers can be horribly wrong sometimes.

Do you agree that India has turnaround potential? Share your own opinion at Motley Fool CAPS.