ETF Teardown: The Best Utility Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds are a popular investing tool. ETFs hold a collection of stocks that share certain elements, so if investors want to capitalize on the increasing demand for basic utilities, for example, they can turn to Utilities Select Sector SPDR (AMEX:XLU), which invests in a basket of diversified utility stocks.

But because Utilities Select Sector invests in a number of stocks, it gives investors a broad diversity that also limits their upside. For an investor who was, say, really hip to foreign utility companies but cold on the prospects of water utility stocks, this ETF 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 the utility sector 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 5,100 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

The utility sector is quite diverse, so there are a number of related tags in CAPS to choose from, including Electric Utilities, Water Utilities, even Foreign Utilities. For investors favoring foreign utilities, for instance, this tag presents a list of 18 investments that trade on American exchanges. This particular collection of investments has risen 38.7% in the past year, topping the 9% gain in the S&P over the same time.

To get a sense of which companies the CAPS community thinks are the best utility opportunities today -- and the ones they recommend staying away from -- we can sort any of these lists by their CAPS star rank, denoted by one to five stars, with five being the best. Each company can then be viewed for exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here's a sampling of some of the utility stocks our screen pulled up today. 

One of the five-star utility stocks topping our screen is Chinese electrical utility and Motley Fool Rule Breakers recommendation Huaneng Power. It doesn't take much these days to get investors excited about China -- with near double digit GDP growth and energy demand projected to eclipse demand in the United States, investors have already put two and two together with Huaneng Power, so, no surprise, it gets high ratings in CAPS.

Huaneng has powered revenue growth in excess of 20% annually over the past five years and net income has grown more than 10% per year in the same time frame. The company recently completed a trial run of a new coal-fired generating unit to bring its generating capacity to 29,387 megawatts.

Even with the company's margins getting burned by high coal prices, CAPS investors largely believe the growth prospects and work toward more efficient and clean energy generation will pay off for Huaneng Power. Of the 290 CAPS All-Stars rating the company, all but two believe the company has the right stuff to outpace the S&P going forward. With the continued demand for energy in China and a current dividend yield of 2.7%, the job may not be that difficult.

Stateside, Progress Energy is working feverishly to keep up with power demand for more than 3 million customers in the Carolinas and Florida. The company recently idled its synthetic fuel production as the high price of oil has made the business more and more expensive, opting to instead focus on its core power generating operations. Some investors are encouraged about Progress' potential plans for a nuclear power facility, although a generating reactor would not come online until 2018 at the earliest. A good contingent of CAPS investors are weary of the stock though, with more than 20% of investors believing the stock will underperform the S&P going forward.

You can lead a horse to water ...
Plucking individual stocks from the diverse utility sector 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 on a stock.

So, do you agree that domestic electric utilities are still the best places to invest? Or are foreign energy plays the better bet? Give your own opinion at Motley Fool CAPS.