Teardown: Top Stocks in Emerging Markets

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 in common. For example, if investors want to capitalize on tantalizing opportunities in emerging markets, they can buy shares in Vanguard Emerging Markets ETF (AMEX:VWO) or iShares MSCI Emerging Markets Index Fund (NYSE:EEM), which diversify in stocks across markets in countries such as Brazil, Russia, and Taiwan.

But since these ETFs invest in a number of stocks, they give you a broad diversity that also limits your upside. For an investor who was, say, really hip to opportunities in the emerging Brazilian market but cold on the future prospects of Russian stocks, these ETFs wouldn't fit the bill.

Fear not -- in this edition of "Teardown," we'll look at ways to quickly ferret out the best emerging-market stocks out there. 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, any of the 4,300 rated stocks profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting a tag in CAPS for an emerging market such as Brazil, Russia, or Taiwan presents a list of potential investments to consider. For instance, the "Brazil" tag returns more than 20 companies that trade on American exchanges with significant exposure to the Brazilian market. This particular collection of investments has done well in the past year, up 25.5% versus the S&P gain of only 13.1%. The "Russia" tag pulls up seven companies that have collectively returned investors an impressive 74% in the past year.

To get a sense of which companies the CAPS community thinks are the best opportunities in some of these emerging markets today, we can sort these businesses by their CAPS star rank (one to five stars, with five being the best). We can then examine each individual company 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 a few of the five-star stocks from our screen of Russian and Brazilian stocks pulled up today.

Like many other emerging markets around the world, telecommunications stands out as an investment favorite in Russia. Mobile TeleSystems is the largest mobile telephony provider in Russia. The company, along with competitor  Vimpel Communications, is rapidly expanding networks in its home state of Russia and surrounding markets. Along with this expansion, Mobile TeleSystems is improving operations and expanding margins, helping drive positive cash flow. The belief that the company is still in the early growth phases has CAPS bulls outnumbering bears by more than 25-to-1. 

Steel and mining have also shown to be high-growth industries in both Russia and Brazil. Based in Russia, Mechel sells several mining products and concentrated ores as well as finished steel products. Companhia Vale and Gerdau provide steel and other metal products through operations in Brazil, as well as other regions of South America. To CAPS investors, high demand for industrial steel products in the companies' respective markets and strong operating margins across this industry are reasons to be positive about the stocks going forward. Investors as a whole seem to agree; all three of these companies have returned in excess of 30% in the last six months alone.

And just in case you're not tantalized by metals processing or dirt-digging, Companhia Sanea will make you swoon with its business of water and sewage services. Operating in the state of Sao Paulo, the company distributes water and reclaims waste through its vast pipelines (don't worry, they're two separate pipelines) covering 30 municipalities. Boring or not, the prospects of continued economic growth in Brazil have investors heavily favoring Companhia Sanea (207 out of 208) to outperform the general market going forward. CAPS All-Stars -- those who have demonstrated exceptional stock-picking skills -- agree, citing the reasonable price and 3.6% dividend yield as enticing factors.

You can lead a horse to water ...
Plucking individual stocks from emerging markets such as Russia or Brazil is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation -- after all, even the best stock pickers can be horribly wrong on a stock.

Do you agree that mining and steel are some of the best plays in emerging markets? Or is telecommunications a better play? Give your own opinion in Motley Fool CAPS.

Motley Fool Global Gains is yet another resource the Fool offers to help you find some of the greatest investment opportunities beyond our borders. Check out our new international investing service 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. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.