ETF Teardown: The Best Wireless Stocks

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 rapid growth of wireless services around the world, for example, they can turn to Wireless HOLDRs, which holds significant stakes in companies such as Nokia (NYSE: NOK) and Vodafone (NYSE: VOD). But since this ETF invests in a number of companies, 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 investments in the wireless sector. 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 can be "tagged" with descriptors that group the company with others in the same category -- "Silver," for example, or "Micro Cap."

Selecting the "Wireless Communications" label in CAPS gives you a list of 81 companies that trade on American exchanges and carry this tag. This particular collection of investments has managed to return 5.6% in the past year, while the S&P 500 dropped 4.8% in the same period.

To gauge which companies the CAPS community considers good opportunities in the wireless sector today, we'll sort these businesses by their CAPS star rating, from one to the maximum five stars. We'll then examine the individual 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 of the wireless stocks I've pulled from CAPS today:

Bottom feeding
Two companies holding up the bottom of the list this week -- former WiMAX partnersClearwire and Sprint Nextel -- generally earn investors' scorn for several reasons

Clearwire's ambition to blanket the United States with a broadband wireless network had its share of skeptics from the beginning, but with credit markets tightening, more and more investors have turned bearish on the firm. Since Clearwire continues to burn cash with tremendous speed, some investors believe the gravy will run out before the bird is even done. While Clearwire holds more than $1 billion in cash and short-term investments, the company spent $155 million in operations last quarter, and its expenses have steadily and significantly risen over the last several quarters.

Clearwire took another whammy when Sprint Nextel hit hard times, nixing a partnership aimed to help both companies deploy a nationwide network more quickly. While ongoing rumors -- including a recent report today from The Wall Street Journal -- speculate that the two companies will eventually reunite, some investors fear that Sprint Nextel may significantly curtail its wireless broadband efforts. Continued ugly results and a new CEO cleaning house at Sprint Nextel leave some believing that the firm could drop its current broadband ambitions altogether.

Given the turmoil surrounding both companies, our CAPS community has curbed its enthusiasm. Clearwire has 50 bears out of the 274 investors rating the company, while Sprint Nextel sports 197 pessimists out of 743 total.

The A-list
In contrast, broadband equipment firm Alvarion holds a top spot on our list of wireless stocks. While Israel-based Alvarion is also intimately tied to the success of WiMAX networks, investors believe the firm is in a much better position than Clearwire and Sprint Nextel. For starters, Alvarion is simply providing the equipment that runs the networks, rather than carrying the immense cash burden of actually deploying and operating those systems.

That said, Alvarion is certainly not immune to the ups and downs of next-generation network deployments. Sprint Nextel's troubles significantly weakened shares of Alvarion, as investors saw a major opportunity for the company slipping away. While the U.S. is only one of dozens of countries deploying multiple WiMAX networks, the market nonetheless took Sprint's woes as a bad sign. Still, Alvarion's wide customer base is one of the many reasons why 453 of the 467 investors rating the company in CAPS believe it will outrun the S&P in the future.

You can lead a horse to water ...
Plucking individual stocks from the wireless sector is always a high-risk endeavor. Investors should perform their own due diligence on companies, rather than taking anyone's recommendation, ours included. After all, even the best stock pickers can be horribly wrong on a stock.

Do you agree that WiMAX services are a small-f fool's errand? Or are equipment providers a better play? Give your own opinion in Motley Fool CAPS.