ETF Teardown: Brazil'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 group of stocks that have common elements, so, for example, if investors want to capitalize on the booming economy in Brazil, they can turn to iShares MSCI Brazil Index (AMEX:EWZ), which contains more than 50 Brazilian stocks in industries such as energy, telecommunications, and consumer goods.  

An ETF's investment in stocks from various industries gives you diversity but can limit your upside. For an investor who was really hip to utilities in Brazil but cold on the prospects of bank 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 for screening and ranking stocks and stock pickers.

The power of tags
To help investors locate great stocks quickly, any of the 5,000 rated stocks 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 25 Brazilian investments that trade on American exchanges. This particular collection of investments has done well in the past year, up 57% versus the S&P gain of only 14.9%.

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.

Little has changed with investors' enthusiasm for Brazilian stocks since we last combed through this popular ETF. The prospects for companies supplying products and services to basic industries such as mining, steel production, and banking continues to grow with the expanding Brazilian economy.

Another, not-so-sexy factor that expands alongside economies is the need for municipal services such as water, electricity, gas, and sewage. Companhia de Saneamento Basico (or Sabesp) provides water to more than 25 million people in 367 Brazilian cities. The company has been busily re-signing cities to long-term water and sewage supply and service contracts that aim to improve sanitation and basic living conditions in Sao Paulo. While the company grew gross revenue at a 10% rate in the most recent quarter, only 3.2% of the growth came from billed water and sewage volume, with the balance coming from tariff adjustments. But Sabesp's valuation relative to global utility peers is why many CAPS investors are bullish on the company, including all 177 of the CAPS All-Stars who rated it. 

One Brazilian bank aggressively pursuing the growth opportunities in South America is Banco Itau. The company expanded its presence in Brazil last year and moved into Chile and Uruguay by purchasing Bank of America's (NYSE:BAC) operations with company stock.

At a current price-to-earnings ratio of 22, shares in Banco Itau aren't exactly cheap, but concerns about the spread of the U.S. subprime malaise last month helped drop shares by more than 20%. In an effort to distance itself from risks associated with bad housing loans, Banco Itau issued a statement last month clarifying that it does not participate in loans made in subprime markets or in high-risk collateralized debt obligations. While the company is still exposed to risks in the emerging middle-class economies of Brazil and other South American nations, CAPS investors largely favor Banco Itau, with 151 out of 157 investors betting that the stock will beat the S&P going forward.

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 utilities are the best places to be in Brazil? Or is banking the better play? Give your own opinion in Motley Fool CAPS.