ETF Teardown: France's Top Stocks

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Noted for simplicity and other advantages over mutual funds, exchange-traded funds are now a popular investing tool.

ETFs hold a collection of stocks that share certain elements. For example, if investors believe new opportunities will emerge in France with new president Nicolas Sarkozy's pro-business policies, they can buy shares in iShares MSCI France Index, which holds a diverse set of stocks from the country including top holdings Total SA (NYSE: TOT) and drug maker Sanofi-Aventis (NYSE: SNY).

Since this ETF invests in a number of stocks, its diversity limits your upside. For an investor who's, say, really hip to energy concerns, but cold on French consumer goods companies, this ETF wouldn't fit the bill.

Fear not, Fool -- in this edition of "ETF Teardown," we'll look for ways to discover the best stocks France 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, the more than 5,200 stocks CAPS rates are tagged with descriptors that group the company with others sharing certain qualities -- "agricultural chemicals," for example, or "Venezuela."

The "France" tag, for instance, returns 24 companies with significant exposure to the French market that trade on American exchanges. This particular collection of investments has weathered the past year well, up 9.3% versus a 5.4% gain in the S&P 500 index.

To gauge which companies the CAPS community thinks offer the best opportunities in France today, we'll sort these businesses by their CAPS star rank (from one to the maximum five stars). We'll then examine CAPS data on each 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 some French stocks gleaned from CAPS today:

Company	CAPS Rank	Industry
Veolia Environnement	*****	Utilities
AXA	*****	Life Insurance
France Telecom (NYSE: FTE)	****	Telecommunications Services
Flamel Technologies (Nasdaq: FLML)	***	Drug Delivery Systems
Alcatel-Lucent (NYSE: ALU)	**	Telecommunications Equipment

Say "Enchantez, bonjour"
Home to more than 61 million people, French citizens are connected through a well-developed communication infrastructure thanks to the largest provider of telecommunications services in the nation, France Telecom. The $100 billion provider of integrated voice and data communication services earns high marks from many investors in CAPS, thanks to not only its dominant position at home, but also significant operations in many European and emerging markets.

France Telecom's Orange wireless division has exclusive rights to sell the Apple (Nasdaq: AAPL) iPhone in France, and it hopes to sell nearly 100,000 by year's end. The excitement surrounding the iPhone and better-than-expected third-quarter results -- which included increased guidance for 2007 from management -- have fueled a steady rise in shares over several months. A solid contingent of CAPS investors is optimistic too, with 173 of the 181 investors who rated the company giving it the thumbs-up.

Say "Quel dommage, au revoir"
On the flip side, a French stock that many investors have been hanging up on lately is drug delivery specialist Flamel Technologies. But many CAPS investors smell opportunity in shares that have been beaten down, and Flamel certainly meets the "beaten down" criteria, with shares down nearly 75% this year.

The pain for Flamel investors seemingly comes from all sides, but all centers on disappointing results so far with a controlled release version of heart-disease drug Coreg, which it helped design for GlaxoSmithKline. With Flamel's future tied to unspecified royalties on the drug as well as manufacturing revenues, investors hold a lot of uncertainty about Flamel's prospects.

Still, many CAPS investors see the company as being oversold. The prospects for more deals -- like the one recently announced with Wyeth (NYSE: WYE) to develop a new version of an unnamed drug -- has some investors still making bullish calls on Flamel. At this point, 88 of the 110 CAPS All-Stars rating the company believe it will beat the S&P going forward. There's likely only one thing certain about Flamel though -- more volatility lies ahead.

Lead a horse to euro ...
Plucking individual stocks from France is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take recommendations -- after all, even the best stock pickers can be horribly wrong.

Do you agree that telecommunications companies are some of the best plays in the newly pro-business French market? Or are biopharmaceuticals a better play? Give your own opinion in Motley Fool CAPS.