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, so that if investors want to capitalize on the booming economy in Brazil, for example, they can turn to iShares MSCI Brazil Index (AMEX: EWZ), which contains more than 40 Brazilian stocks in industries including energy, telecommunications, and consumer goods.
An ETF's investment in stocks from various industries gives you broad diversity, but also limits your upside. For an investor who was really hip to oil and gas explorers in the region but cold on the future prospects of telecom stocks, these ETFs wouldn't fit the bill.
Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what Brazil has to offer. 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 4,600 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.
Selecting the "Brazil" tag in CAPS presents a list of more than 20 Brazilian investments that trade on American exchanges. This particular collection of investments has done well in the past year, up 60% versus the S&P gain of only 13%.
To get a sense of which companies the CAPS community thinks are the best opportunities in Brazil today, we can sort this list by CAPS rank on a scale of one to five stars, with five being the best. Then we can take a look at exactly who -- from Wall Street to Main Street -- is bullish or bearish on each company and why.
Getting down to the nitty-gritty
Here are a few of the five-star stocks our screen pulled up today.
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Company
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CAPS Rank
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Petroleo Brasileiro (NYSE: PBR)
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*****
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CPFL Energia (NYSE: CPL)
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*****
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Sadia (NYSE: SDA)
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*****
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Embraer (NYSE: ERJ)
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*****
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Brasil Telecom (NYSE: BTM)
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*****
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In looking at what the CAPS community favors in Brazil, the list is stacked with many of the basic industries, such as oil and gas, energy and telecom. With a large geographic footprint and an emerging economy, it's no surprise that Brazilian companies such as CPFL Energia see significant demand for electricity. The holding company owns an interest in several electric power distribution, generation, and commercialization companies around Brazil.
CAPS players heavily favor the company to outperform the S&P, with all 46 of the CAPS All-Stars who rated the company giving it the thumbs-up. Investors cite the low P/E and whopping 8.9% yield -- a strong number even considering currency risk -- as reasons they are bullish on the company.
Another company providing some of life's necessities to the Brazilian population -- and around the globe -- is meat and poultry producer Sadia. In existence for more than 60 years, the Motley Fool Hidden Gems recommendation primarily provides fresh and frozen poultry products. Many CAPS investors believe the fear of bird flu and rising corn feed prices are overblown and aren't enough to overcome the positives at this company: Sadia bulls outnumber bears by a ratio of more than 50-to-1.
Brazil also hosts attractive businesses building products that make day-to-day life better. Jet manufacturer Embraer has been a favorite of international investors for years, showing that it can compete with global heavyweights such as Boeing (NYSE: BA) and Airbus. And even though the company has stumbled recently with production delays, CAPS investors see the huge order backlog as a reason to hold the stock. Investors also like inroads the company has made into the popular market for smaller, regional jets, yielding an Embraer bulls-to-bears ratio of more than 40-to-1.
You can lead a horse to water ...
Plucking individual stocks from an emerging market such as Brazil is a high-risk endeavor. Investors should always perform their own due diligence on companies rather than blindly take a recommendation -- after all, even the best stock pickers can be horribly wrong.
So do you agree that energy and basic materials are the best places to be in Brazil? Or is chicken the better play? Give your own opinion in Motley Fool CAPS.
Global Gains lead analyst Bill Mann is currently traveling in China, India, and Taiwan in search of new investment opportunities in some of the world's fastest-growing economies. Get updates and analysis live from the field by sending Bill an email at BillTrip@Fool.com.
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. Embraer is a Stock Advisor recommendation. Dave is the author ofThe Qualcomm Equation. The Fool has a disclosure policy.
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