ETF Teardown: Top South African Stocks

• Email
• Share
• Print

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. If investors want to capitalize on the budding growth in South African markets, they can buy shares in iShares MSCI South Africa Index (NYSE: EZA). But with this ETF's diversity in a number of stocks, the upside is also limited.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments South Africa 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 locate great stocks quickly, CAPS-rated stocks are tagged with descriptors that group the company with others in the same category -- "Railroads," for example, or "Metal Fabrication."

Selecting the "South Africa" label in CAPS gives you a list of 10 investments that are either based in or derive significant business from the nation at the bottom of Africa. This collection has easily outrun the broader market in the past year, up 9.3%, while the S&P 500 has ticked down by nearly 8%.

To gauge which companies the CAPS community thinks offer good opportunities in this region, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a couple of the companies 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 South African-tagged stocks I've pulled from CAPS today:

Company	CAPS Rank (5 Max)	Industry
Sasol (NYSE: SSL)	*****	Integrated Oil and Gas
Highveld Steel (Nasdaq: HSVLY)	*****	Steel Manufacturing
Gold Fields (NYSE: GFI)	****	Gold Mining
Harmony Gold (NYSE: HMY)	****	Gold Mining
AngloGold Ashanti (NYSE: AU)	****	Gold Mining
Telkom SA (NYSE: TKG)	****	Telecommunications

Digging where others don't
Surprise, surprise -- South Africa is home to many gold-mining companies. But although many gold miners in the region -- including the three on our table today -- receive high marks in CAPS, investors may be more interested in other companies that aren't so mainstream. One of those avoiding the limelight yet still holding great prospects is South African communications company Telkom SA.

Often regarded as a developing nation, South Africa is usually left off most lists that include China, India, and Brazil. But there's good reason for that omission -- South Africa's development faces many unique issues not seen in other maturing but booming nations. Still, telecommunications services are expected to grow dramatically in South Africa, particularly cellular services. Global player Vodafone has already latched onto the growth in mobile services in Africa by acquiring a 50% stake in Vodacom, with the other half belonging to Telkom SA. 

Even though a deal that would have split off Telkom's wire-line services to another South African company, MTN, fell apart late last year, consolidation rumors continue to swirl around the company. In addition to other parties, Vodafone continues to voice an interest in an increased stake in Vodacom, making it likely that some merger and consolidation plan will eventually emerge with Telkom.

Telkom remains a highly profitable company, but analysts project negative growth for the company, on the order of  a 3% downturn. The bleak outlook explains why a cash-flowing company with a generous 4.6% dividend yield would be trading at a measly trailing earnings multiple of 9. But a good number of CAPS investors see value in the assets of Telkom and believe that growth in cellular will carry this bargain-bin stock higher. Indeed, 75 of the 78 players rating the company believe it will beat the market going forward.

You can lead a horse to water ...
Plucking individual stocks from the South African market is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies.

So, do you agree that there's upside in South African communications? Or is gold mining still the best place to park cash? Give your opinion in Motley Fool CAPS.