ETF Teardown: India'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 in common, so that if investors want to capitalize on the prospects in India, for example, they can turn to the iPath MSCI India ETN.

Since this ETF invests in dozens of stocks, it gives you a broad diversity that also limits your upside. For an investor who was, say, really hip to Indian auto manufacturers but cold to the prospects of outsourcing firms, this ETF (ETN stands for exchange-traded note) wouldn't fit the bill.

Fear not, Fools. In this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what India 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 4,900 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 India tag in CAPS presents a list of 22 Indian investments -- one of them being the iPath MSCI India ETN -- that trade on American exchanges. This particular collection of investments has fallen short of broader market returns in the past year, up only 9.8% versus the S&P gain of 13.3%.

But focusing on particular segments of the Indian market can offer tremendous potential for growth. To get a sense of which companies the CAPS community thinks are the best opportunities in India today, we can sort this list by their CAPS star rankings -- 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.

The nitty-gritty
Here are a few of the stocks our screen pulled up today.

While U.S. automakers have few fans on Wall Street these days, foreign automakers such as Tata Motors are a different story. Part of India's giant Tata Group, the company is a major supplier of commercial and consumer vehicles in a nation with a flourishing economy. But the increasing domestic demand for automobiles is only one of many reasons cited by some of the 98% of CAPS investors who are bullish on the stock. Many investors also like Tata's aggressive move into other emerging markets and its bold step toward producing the world's cheapest car.

The strong track record of the company and 27.6% revenue growth in the trailing 12 months have some investors comparing Tata to a young Toyota Motors (NYSE:TM), and even Ford (NYSE:F) back in its glory days. On the downside, rising costs spurred by increasing steel and energy prices is a concern with the industry as a whole, and Tata is not immune. Also, foreign automakers are a formidable threat and could put a dent in the door of Tata's growth plans. But CAPS investors by and large believe the company can manage these obstacles and prove itself a global leader.

Metals and mining company Sterlite Industries is another top-rated CAPS stocks making our list. The $10.1 billion company is one of India's largest and supplies a significant share of the copper, zinc, and aluminum produced in the country through complete or partial ownership of its subsidiaries. The company is also getting into the commercial power generation business through the development of a thermal coal-powered facility.

Rising commodity prices -- particularly zinc -- have been a boon for Sterlite, helping the company nearly double revenue in fiscal 2007. Given that demand for raw materials around the world is booming, particularly from emerging markets such as India, Brazil, and China, CAPS investors see continued dramatic growth for Sterlite. And with a P/E ratio of 6.8 -- well below the 9.8 sported by peer Freeport McMoRan (NYSE:FCX) -- that growth is coming pretty darn cheap. No wonder all 85 of the CAPS All-Star investors rating the company believe it will beat the market.

You can lead a horse to water ...
Plucking individual stocks from an emerging market such as India 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.

So do you agree that auto manufacturing is the best place to be in India? Or are the outsourced services of IT companies better positioned to outgrow the market? Give your own opinion in Motley Fool CAPS.

Motley Fool Global Gains is another resource the Fool offers to 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. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.