ETF Teardown: Japan'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 booming sectors in Japan, for example, they can turn to iShares MSCI Japan Index -- a contender for the best ETF of 2007 -- or the Vanguard Pacific Stock ETF (AMEX:VPL).

But since these ETFs invest in a number of stocks, they give you a broad diversity that also limits your upside. For an investor who was, say, really hip to auto manufacturers in the region but cold on the future prospects of Japanese game-console makers, these ETFs 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 Japan 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 5,000 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others sharing a certain quality.

Selecting the "Japan" tag in CAPS presents a list of 34 Japanese investments that trade on American exchanges. This particular collection of investments has dropped 5.6% in the past year versus an S&P gain of 11.8%. Yet many investors see great opportunities in some undervalued Japanese stocks with solid futures, regardless of general past underperformance.

To get a sense of which companies the CAPS community thinks are the best opportunities in Japan today, we can sort this list of contenders by their CAPS star rank, denoted by one to five stars, with five being the best. We can then view each of the individual companies based on exactly who -- from Wall Street to Main Street -- is bullish or bearish on the company and why.

Getting down to the nitty-gritty
Here are a few Japanese stocks our screen pulled up today, along with their respective CAPS rankings.

Large electronics firms such as Sony and Kyocera are well represented in Japan -- not a  big surprise, given that Japan is known for its tech-savvy culture loaded with gadgets and home-entertainment products. But whether you still consider it a tech powerhouse or not, Sony hasn't endeared the hearts of many investors in CAPS, as evidenced by its low, one-star rating.

While Sony is broadly diversified across entertainment, finance, and electronics, many investors lament that ongoing losses in the gaming unit are dragging the company down. With unrelenting competition from Microsoft (NASDAQ:MSFT) and Nintendo to Sony's PlayStation legacy, some investors see Sony's struggle in gaming as reason enough to pan the stock. Even a $100 price drop on the 60 GB version of the PS3 console smacks more of desperation than a knockout move by a company that many see as yielding the leading position it has enjoyed in the past.

Of the 110 All-Star CAPS investors who currently give the stock a thumbs-down, many also cite Sony's poor recent track record in consumer electronics and portable music, where the once-untouchable Walkman now takes a back seat to Apple's (NASDAQ:AAPL) iPod line. To help turn its luck around, the company recently committed to raise roughly $3 billion from an IPO of its financial arm to prop up other divisions. Investors read these collective signs as evidence of a company still struggling, though, and in general they don't see much reason to be excited about the stock at this point.

Game maker Nintendo, on the other hand, has earned some respect from investors for a surprisingly strong performance from its much lower-priced Wii gaming console -- a full 99% of the nearly 1,000 CAPS investors rating the company believe it will beat the market going forward. With Nintendo's market share of consoles and software titles showing that competition is less of a threat than was perceived, investors are optimistic about the coming holiday season and more growth from Nintendo's iconic game characters.

You can lead a horse to water ...
Plucking individual stocks from any foreign market is, of course, a complicated endeavor, since there are many additional factors to consider first. Investors should always perform their own due diligence on companies rather than blindly take a recommendation -- after all, even the best stock pickers can be horribly wrong sometimes.

So do you agree that auto manufacturing is the best place to be in Japan? Or are Japanese gaming companies a better play? Give your own opinion in Motley Fool CAPS.