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ETF Teardown: Brazil's Top Stocks

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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 hunting for opportunity in the emerging economy of Brazil, for example, can turn to the iShares MSCI Brazil Index ETF, which counts Petroleo Brasileiro (NYSE: PBR  ) and Companhia Siderurgica Nacional (NYSE: SID  ) in its top holdings. But the broad diversity of many ETFs also limits your upside -- and investors may dilute stellar returns away 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 Brazil. 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 nearly 5,400 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Bio-Pharmaceuticals," for example, or "Diversified Utilities."

Selecting the "Brazil" tag in CAPS gives you a list of 32 Brazilian investments that trade on American exchanges. This particular collection of investments has been hit hard in the past year, falling 43.6% versus an S&P loss of 38%.

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


Rank (out of 5)


Banco Itau Holding Financeira (NYSE: ITU  )


Banking Services

Vale (NYSE: RIO  )


Iron Ore Production

Aracruz Celulose


Pulp Producer

Brasil Telecom Participacoes (NYSE: BRP  )


Telecommunications Services

Banco Itau
As one of Brazil’s largest private sector banks -- along with leader Banco Bradesco (NYSE: BBD  ) -- Banco Itau has plans to take advantage of current market turmoil by purchasing the loan portfolios of some of their less fortunate competitors, which have been pinched by the credit squeeze. The company has benefited from a huge demand in consumer loans in Brazil’s fast-growing economy at a time when U.S. and European banks are in peril. To help alleviate investors' fears in a turbulent financial sector, Banco Itau announced early a quarterly profit of nearly $776 million, 14.6% better than last year. More than 97% of the 544 CAPS members rating Banco Itau are bullish on the company.

Despite concerns about decreased demand for its iron ore as the financial crisis deepens, Vale has said it will not ship to China, its largest market, unless they agree to pay a 12% price increase. Even though steel production has declined in China as demand decreases, Vale believes it can hold off sales for a while in anticipation that some less efficient iron ore producers will fail, forcing steel producers to pay the higher cost.

As the largest iron ore producer in the world, Vale faces plenty of rising competition, even in its own backyard. Recently, Brazilian steelmaker Companhia Siderurgica Nacional sold a 40% stake in its Namisa iron ore mine to a consortium of Asian companies. But CAPS members largely believe Vale will hold its ground, with nearly 98% of the 5,755 who've rated Vale believing it will outperform the broader market.

Aracruz Celulose
Financial companies aren't the only ones stinging from hedging activities lately -- volatility in exchange rates have hit Brazilian firms such as poultry producer Sadia (NYSE: SDA  ) and pulp producer Aracruz.  Earlier in the month, Aracruz announced it would lose $951 million at current market prices because of its foreign exchange derivatives. Subsequent credit downgrades have helped knocked shares of Aracruz way down -- more than 60% in the past month. But despite the pessimistic price move, the company still has fans -- 260 out of 273 total CAPS members rating the company believe it will outperform the market.

Brasil Telecom Participacoes
Brasil Telecom Participacoes, which holds a controlling stake in Brazil's third-largest fixed-line telecom operator, announced third-quarter net revenue of about $1.3 billion, up 3.4% over the third-quarter in 2007. Even better, net income rose more than 9% over the same quarter last year. The company is on the upswing by operating more efficiently and controlling its revenue costs, which have declined consecutively over the last several years -- 64% in 2005, 63% in 2006 and 58% in 2007. Nearly 97% of the 363 CAPS members rating Brasil Telecom believe the company will outperform the overall market going forward.

Lead a horse to water ...
Plucking individual stocks from any region 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 there are beaten down values in Brazil? Give your opinion at Motley Fool CAPS.

Motley Fool Global Gains is yet another Foolish resource to help you find promising investment opportunities beyond our borders. Check out what stocks the analyst team is picking today with a test drive that is totally free for 30 days.

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. Sadia is a Hidden Gems recommendation. Petroleo Brasileiro is an Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy was bummed that it couldn't link hands around the world for obvious anatomical reasons.

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