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 a collection of stocks that share certain elements. Investors bullish on growth in the gas production sector, for example, can turn to PowerShares Dynamic Oil & Gas Services or iShares Dow Jones U.S. Energy. But because these ETFs invest in a number of energy-related stocks, their 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 gas production 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 5,700 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Coal," for example, or "Graphics Software."

Selecting the Gas label in CAPS gives you a list of 89 companies that trade on American exchanges. As anyone living in a world of escalating gas prices can imagine, this particular collection of investments has absolutely crushed the general market in the past year, up 40%, while the S&P 500 has dropped 10%.

To gauge which companies the CAPS community picks as the best opportunities in gas production today, we'll sort a sampling of these businesses by their CAPS star rating, 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 gas stocks I've gleaned from CAPS today.

It just keeps on ticking!
With the average gas stock sporting a four-star rating in CAPS, investors clearly embrace the macroeconomic factors driving demand for gas and petroleum products. But even within entire sectors buoyed by forces of global demand, investors want to find the best companies for the best price.

A solid contingent of CAPS investors thinks that Chesapeake Energy is one such stock.  With reported year-over-year production increases at many of its sites -- including a 125% increase at the Barnett Shale and a 700% jump at Fayetteville Shale -- some folks are wondering if the major petroleum player will ever run out of gas. And to help investors fill their own tanks this summer, Chesapeake's board announced it would raise its quarterly dividend 11% to $0.075.

Continuing its legacy, the company announced it would increase drilling operations at its Haynesville site, with plans to operate at least 12 rigs by the end of the year at least 30 rigs by the end of 2009. Management said the site could have a larger impact on the company than any other play so far. With Chesapeake's chief putting his own money on the line, a staggering number of CAPS investors rating the company -- 4,295 out of 4,398 -- believe shares will outperform the S&P.

Drill it and they will come
An important member of the gas value chain, Enterprise Products Partners -- which transports, processes and stores natural gas -- reported that first- quarter profits doubled, with net income increasing to nearly $260 million compared with only $112 million last year. With a 16% increase in onshore natural gas shipping volumes, the company is similarly benefiting from the gas rush.

While the domestic natural gas producers strive to meet demand, Enterprise Products Partners and similar companies, like Spectra Energy, should continue to experience more demand for their services. Two more reasons investors like Enterprise Products Partners: high insider ownership and a healthy 6.8% dividend yield. With few compelling arguments not favoring the company, just nine CAPS investors (out of the 499 rating it) are voting for it to underperform the S&P. The rest are all bulls.

Lead a horse to water ...
Plucking individual stocks from the gas 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 gas investments are the best place for new money today? Or will these companies soon run out of gas? Give your own opinion at Motley Fool CAPS.