ETF Teardown: Canada's Top 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. If investors want to capitalize on the economic rise of companies in Canada, for example, they can turn to iShares MSCI Canada Index, which counts Barrick Gold (NYSE:ABX) and Potash (NYSE:POT) in its top holdings. But since this ETF invests in a number of stocks, its broad 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 of what Canada 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, CAPS-rated stocks can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Casualty Insurance," for example, or "Israel."

Selecting the "Canada" tag in CAPS gives you a list of 45 Canadian investments that trade on American exchanges. This particular collection of investments has handily outrun the general market in the past year, up 28% versus the S&P's gain of only 5%.

To gauge which companies the CAPS community thinks offer the best opportunities in Canada today, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine each individual company to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some Canadian stocks I've gleaned from CAPS today.

Nuclear dilemma
With the United States and other countries around the world showing renewed interest in generating power cleanly and efficiently through nuclear reactors, uranium miners such as Cameco are back on investors' radars. Shares of Cameco, the world's largest producer of uranium, have risen nearly tenfold over the past five years as the spot price for the nuclear fuel has soared.

But with operations at a few of Cameco's mines having been hampered lately, the stock has gone through some gyrations and currently sits little changed for the year. Much of Cameco's growth lately is coming from the rise in uranium spot prices, rather than from production output. With floods at its Rabbit Lake and Cigar Lake mines this year, Cameco is uncertain about its future production capacity until its remediation plans are farther along and safety can be assured.

But CAPS investors are largely bullish about the long-term trends in nuclear power. With each new nuclear power plant established, demand for Cameco's fuel goes up. While a few Cameco bears see the stock as overvalued, given the company's current problems, more than 97% of CAPS investors rating the company believe it will outperform the S&P going forward.

Solar rockets
Staying with the alternative-energy theme, we also find Canadian Solar on our list, thanks to a worldwide desire to move away from reliance on fossil fuels. Interest in the producer of standard and customized solar-cell modules has been increasing dramatically, and the company's shares have tripled in the past six weeks. That run started when Canadian Solar released third-quarter earnings that flew by expectations, with a 61% increase in revenue compared with the second quarter.

Citing many new contracts and increased backlog, Canadian Solar also bumped up revenue guidance for the balance of 2007 and for next year. The company has since followed the good news with even more supply contracts, including 60 megawatts of solar modules to German City Solar Group for projects in Spain and a $60 million deal with the Gintech Energy Corporation of Taiwan.

In contrast with the overwhelming favorable opinion on Cameco, however, CAPS investors in general hold a more negative assessment of Canadian Solar. Many investors believe that Canadian Solar is highly overvalued, especially given its slow cash conversion rate relative to its peers. As a result, 57 out of 137 CAPS All-Stars are bearish on the company.

Lead a horse to water ...
Plucking individual stocks from Canada 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.

Do you agree that mining companies hold the best prospects in Canada? Or are biotechs a better play? Give your own opinion in Motley Fool CAPS.