ETF Teardown: Canada'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. If investors want to capitalize on the economic rise of companies in Canada, for example, they can turn to iShares MSCI Canada Index (NYSE:EWC).

But since this ETF invests in a number of stocks, its broad diversity also limits your upside. For an investor who's really hip to energy plays in the region, but cold on the future prospects of Canadian communications companies, 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 Canada 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 profiled in CAPS can be "tagged" with a keyword. These keywords group companies with others sharing a given quality.

Selecting the "Canada" tag in CAPS gives you a list of 40 Canadian investments that trade on American exchanges. This particular collection of investments has outrun the general market in the past year, up 17.5% versus the S&P gain of only 12.4%.

To gauge which companies the CAPS community considers the best opportunities in Canada today, we can sort this list by each firm's CAPS star rank, denoted by one to five stars, with five being the best. We'll then see who on Wall Street (and Main Street) is bullish or bearish on which company, and why.

Getting down to the nitty-gritty
Here are a few of the Canadian stocks our screen pulled up today.

The CAPS community shows pretty clearly that the mining and energy sectors are high on the list of investors' favorite stocks. Fording Canadian Coal Trust is one of several mining firms (it's actually a Canadian royalty trust) receiving five-star accolades in CAPS, with 145 of 151 All-Star investors voting the way of the bull. The firm's wide base of coal mining assets and the global demand for energy and commodities has kept investors particularly impressed with Fording. But even though the stock has appreciated more than 500% in the past five years, at least a few investors are speculating that the party might be over, as changes in Canada's tax laws set to take effect in 2011 may reduce incentives for trusts to continue paying out massive dividends.

With strong cash-generating assets in diversified sectors such as real estate, financial, and power generation, CAPS investors also give high marks to Brookfield Asset Management. Management's track record in realizing value from premium assets is one of many reasons why investors believe this company can continue to outperform the market, even after a huge run in shares in the past five years. While recent concerns about defaults in residential housing markets have affected the stock, Brookfield's real estate assets are mostly concentrated in commercial properties, which will help buffer the company against residential real estate turbulence.

Not every Canadian company gets a warm welcome in CAPS Land however -- some such as Nortel and Research In Motion get a chilly reception. Comparing the two wireless giants reveals completely different reasons behind the pessimism, however: Whereas RIM's story has been one of amazing growth and an insane valuation, Nortel has been more of a "let me know when the bleeding stops" investment story. Nortel is now several years into a restructuring that has a new management team exuding confidence in the company -- CEO Mike Zafirovski spent about $1 million of his own money to buy shares of Nortel on the open market. But while some investors smell turnaround, a large contingent isn't convinced quite yet -- just more than half of CAPS All-Stars rating the company still believe Nortel will underperform the S&P going forward.

You can lead a horse to water ...
Plucking individual stocks from even a relatively more stable international market such as Canada's is risky. Investors should always perform their own due diligence on companies, rather than taking a recommendation at face value. After all, even the best stock pickers can be horribly wrong on a stock.

Do you agree that energy concerns are still the best opportunity in Canadian business? Or are communications stocks a better play? Give your opinion in Motley Fool CAPS.