ETF Teardown: Canada's Top 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. If investors want to capitalize on the flourishing economy in Canada, for example, they can turn to iShares MSCI Canada Index, which counts Canadian Natural Resources (NYSE:CNQ) and Bank of Nova Scotia (NYSE:BNS) in its top holdings. But because this ETF invests in a number of stocks, its broad diversity also limits your upside.

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, the 5,600 stocks rated in CAPS can be "tagged" with descriptors that group the company with others sharing certain qualities -- "Shipping," for example, or "Dine-In Restaurant."

Selecting the "Canada" tag in CAPS gives you a list of 52 Canadian investments that trade on American exchanges. This particular collection of investments has humbled the general market in the past year, up around 24% versus an S&P loss of 7%.

To gauge which companies the CAPS community thinks offer the best opportunities in Canada today, we'll sort a sampling of these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine a few companies 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 Canadian stocks I've gleaned from CAPS today.

Buyback blues  
Shareholders in one of Canada's largest drugmakers, Biovail, have had happier days -- but it's been an awfully long time. Shares of the developer of depression-fighting medication haven't shown any cheerful trends in the past several years. The company has met with one disappointment after another.

Following more bad news about delays in a reformulation for its depression treatment Wellbutrin, Biovail has communicated plans for significant changes in its focus on central-nervous-system disorders. In particular, it has pledged to dump $600 million into the effort over the next several years. Noting that its "previous model was just not working anymore" in the face of generic competition, the company also announced a stock-buyback program designed to shrink its share base.

Citing the significant time, investment, and risk in the plan, including the company's major shift in direction and the commitment of capital to repurchase shares, the S&P put Biovail's ratings on credit watch. But CAPS investors are largely bullish about the long-term prospects of the newly focused company -- 94% of investors rating the company believe it will outperform the S&P going forward.

Dialing a winner?  
Whoever said Canada doesn't do things in a big way hasn't seen the ongoing effort to bring telecom-services giant BCE back into the private realm. To get the $35.1 billion buyout done, BCE recently announced that it had filed all of the required documents with the Canadian Radio-Television and Telecommunications Commission to proceed with the acquisition, led by Teachers' Private Capital.

BCE just reported its best operating-revenue growth in more than two years in Q1 2008. Operating revenue grew 2.3% despite declines in local and long-distance revenues, and it was a record quarter for wireless gross activations, though enthusiasm was tempered a bit because of the high costs of retention and upgrades. So if the deal to go private is cemented, individual investors will probably be disappointed to find no further opportunity to profit from improved performance.

Meanwhile, stuck in public/private limbo with this company, 86% of CAPS investors still favor BCE. Maybe some of the attraction owes to the allure of the 3.7% dividend yield. After all, sharp investors know that dividend-paying stocks can provide higher earnings growth with less risk.

Lead a horse to water ...
Plucking individual stocks from Canada is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. Even the best stock-pickers can be horribly wrong.

Do you agree that a reformulated drug company holds the best prospects in Canada? Or are telecom services a better play? Give your own opinion at Motley Fool CAPS.