ETF Teardown: Top Korean 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 in common, so that if investors want to capitalize on technology-focused global companies in Korea, for example, they can turn to iShares MSCI South Korea Index (NYSE:EWY).

But since the iShares ETF is heavily weighted by one stock -- Samsung, which makes up almost one-quarter of the fund -- investors may not get the exposure to other Korean companies they desire. For an investor who was, say, really hip to steel manufacturers in the region but not so sure about Samsung's growth going forward, this ETF wouldn't fit the bill.

Well, fear not -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what Korea 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 4,300 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting the "South Korea" tag in CAPS presents a list of six investments that are either based in or have significant operations in South Korea, yet trade on American exchanges. This particular collection of investments has failed to match broader market returns in the past year, up only 9.4% versus the S&P gain of 13.2%.

But many think that, as investors scramble to buy into Chinese companies regardless of value, Korean investments have been largely overlooked. To get a sense of which companies the CAPS community thinks are the best opportunities in Korea today, we can review them by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies 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 the list of South Korean stocks our screen pulled up today.

Of all the companies, the CAPS community gives the highest rating to Woori Finance; 29 of 31 investors ranking the company believe it will outperform the market going forward. Korea's leading financial holding company was formed in 2001 when the government aggregated four smaller commercial banks and an investment bank. While its banking subsidiary, Woori Bank, competes with larger rival Kookmin Bank, the company also operates a range of financial groups, including private equity and asset management. CAPS players cite Woori's strong results and opportunities for expansion both domestically and abroad as reasons to favor the stock.

Motley Fool Global Gains recommendation SK Telecom also receives a favorable four-star rating in the CAPS community. The company is the largest provider of wireless services in a country that some claim is the gold standard for advanced wireless services, even ahead of Japan. While the South Korean market for mobile communications is approaching saturation, advanced broadband capabilities and services keep Koreans changing their cellular phones every six to 18 months, well ahead of other developed markets. SK Telecom's strong cash flow and reasonable valuation help counter the intense competition for mobile services offered by competitor KT Corp in this techno-savvy nation.

And for those investors wondering why Korea's largest steel producer, POSCO (NYSE:PKX), isn't on the list, it is actually on its own "Korea" tag. Perhaps the most popular Korean investment, POSCO gets a four-star rating and has 180 out of 190 CAPS players thinking that it will outperform the S&P going forward. With opportunities for global expansion, many investors consider POSCO to be one of the best places to invest for growth.

You can lead a horse to water ...
Plucking individual stocks from a market that faces threats from its northern neighbor is a high-risk endeavor, of course. Investors should always perform their own due diligence on companies rather than taking a recommendation -- after all, even the best stock pickers can be horribly wrong on a stock.

So do you agree that telecom is the best place to be in Korea? Or is steel production still the better play? Give your own opinion in Motley Fool CAPS.

Motley Fool Global Gains can help you find some of the greatest investment opportunities beyond our borders. Check out our new international-investing service free for 30 days.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. POSCO is an Income Investor recommendation. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.