ETF Teardown: Top Emerging-Market 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. For example, if investors want to capitalize on tantalizing opportunities in emerging markets, they can buy shares in iShares MSCI Emerging Markets Index Fund, which invests in diverse stocks from countries such as Brazil, Russia, and Taiwan.

This ETF invests in a number of stocks, and its diversity limits your upside. For an investor who's, say, really hip to airline operators in emerging markets, but cold on pricey Chinese stocks, this ETF wouldn't fit the bill.

Fear not, Fool -- in this edition of "ETF Teardown," we'll look for ways to discover the best emerging-market stocks out there. 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 more than 5,200 stocks CAPS rates can be "tagged" with descriptors that group the company with others sharing certain qualities -- "petroleum," for example, or "Mexico."

Selecting a tag in CAPS for an emerging national market presents a list of potential investments to consider. For instance, the "Brazil" tag returns 27 companies with significant exposure to the Brazilian market that trade on American exchanges. This particular collection of investments has done well in the past year, up 40.7% versus a negligible gain in the S&P.

To gauge which companies the CAPS community thinks offer the best opportunities in emerging markets today, we'll sort these businesses by their CAPS star rank (from one to the maximum five stars). We'll then examine each individual company to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Getting down to the nitty-gritty
Here are some emerging-market stocks gleaned from CAPS today.

Lofty goals
In the U.S., most legacy airline operators have been blacklisted from investors' buy lists thanks to years of underperformance in a brutal environment of cost pressures laced with rising fuel costs. But small, regional airlines such as Southwest (NYSE:LUV) have proven that there is profit in friendly skies.

So what could be better than an airline mimicking Southwest's model and operating in South America, a region expecting rapid passenger growth in the coming years? Brazilian operator GOL has caught the eye of many a CAPS investor, with 270 members rating the company. Spotted as a compelling growth stock on sale earlier this year, GOL Intelligent Airlines has continued to impress investors with profitable top-line growth exceeding 50% over the past few years.

But even emerging markets are subject to slowdowns, and GOL has seen many of the problems that doomed domestic U.S. airlines biting into its operations. Revenues grew more than 20% in Gol's most recent quarter, but earnings dropped 76% as fuel prices soared 38% from last year.

Other costs rose dramatically as well, sending operational costs 50% above year-ago levels. Part of the slowdown is due to the deadly accident at Sao Paulo's Congonhas airport that put a big crimp in ticket sales as passengers canceled flights and avoided air travel.

But many CAPS investors expect GOL to pull out of the recent dive and fly smoothly in the long run. Of the 98 All-Star investors rating the company, 92 expect the stock to outperform the S&P going forward.

Lead a horse to water ...
Plucking individual stocks participating in emerging markets such as Brazil or Russia 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.

Do you agree that mining and natural gas are some of the best plays in emerging markets? Or are foreign airlines a better play? Give your own opinion in Motley Fool CAPS.