ETF Teardown: China's Best 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 and allow investors to get in early on what they believe are tomorrow's big trends.

Investors who are bullish on the future growth potential of China stocks, for example, can turn to iShares FTSE/Xinhua China 25 Index, which includes China Mobile (NYSE:CHL) and PetroChina (NYSE:PTR) in its top holdings. But the broad diversity of many ETFs also limits your upside -- and investors may dilute stellar returns from that one amazing company in the crowd.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to help us find the best investments in China today. 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 5,500 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Casinos," for example, or "Biofuels."

Selecting the "China" label in CAPS gives you a list of 190 companies that trade on American exchanges. This particular collection of investments has outperformed the general market in the past year, up 5%, while the S&P 500 has dipped by 7.7%.

Getting down to the nitty-gritty
Here are some China stocks I've gleaned from CAPS today.

ChinaMedical Technologies
A high-growth stock in a high-growth sector in a high-growth country, it's no wonder China Medical Technologies etched out another impressive quarter. Revenues were up 50% year over year, and a 79% increase in net income went along with the consistently high revenue growth, as the company shifts its focus from tumor therapy systems to more profitable consumable diagnostic tests. To continue its current momentum, the company is offering $240 million in convertible notes, which it intends to use for general corporate purposes, and potentially acquire new businesses, products and technology. Explosive growth has given the stock a five-star ranking in CAPS, with 1,076 of the 1,106 CAPS members rating the firm believing it will continue to outperform the S&P.

Mindray Medical International
With the Chinese market down some 60% from its peak last year, investors may be surprised to find that many companies survived and thrived during the great Chinese crash of 2008. Mindray Medical is one such company; it powered ahead with first-quarter profits up 62%, boding well for its second-quarter results next month. Mindray also recently acquired U.S. medical device maker Datascope, which will provide the company with some needed global reach. Many investors think the time is right for more reasonably valued Chinese companies, and CAPS members overwhelmingly agree; only 18 out of the 1,318 rating Mindray expecting it to underperform the broader market.

Suntech Power Holdings
The sun shines bright for those with a steel stomach who are willing to ride out volatility in China and solar sectors. Just recently, stock in Suntech Power rose nearly 10% on the heels of a recently announced solar project between SunPower and PG&E to provide 800 megawatts of renewable energy. With Suntech flirting near its 52-week low and return on equity above 20%, many investors believe riding the alternative energy trend will prove quite profitable at today's prices. Overall, 97% of the CAPS members rating Suntech expect it will outperform the S&P.

ShengdaTech
Chinese chemical manufacturer ShengdaTech may not be in the sexiest of end markets, but the company posts impressive results while flying below the radar. Like China Precision Steel (NASDAQ:CPSL), the end-products aren't as flashy, but growth has been amazing, with ShengdaTech recently reporting more than 75% revenue growth in the second quarter. The company also added several new global customers across diverse industries and is dramatically ramping up production capacity to meet demand. And a near-unanimous 245 out of 246 CAPS All-Star members rating the company see it continuing to outperform the market.

Lead a horse to water ...
Plucking individual stocks from China is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. Even the best stock pickers can be horribly wrong.

Do you agree that Chinese medical manufacturers still have plenty of upside? Or is solar still the best play? Give your own opinion at Motley Fool CAPS.