ETF Teardown: Brazil's Top Stocks

Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. Investors captivated by the booming economy in Brazil, for instance, can buy into the iShares MSCI Brazil Index (NYSE:EWZ) ETF, which contains more than 70 Brazilian securities in industries such as energy, financials, and consumer staples. But since 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 Brazil 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 locate great stocks quickly, CAPS-rated stocks can be tagged with descriptors that group the company with others in the same category -- "Wind Power," for example, or "Auto Parts."

Selecting the Brazil label in CAPS gives you a list of 31 companies that trade on American exchanges and carry this tag. This particular collection of investments has outrun the general market in the past year, up 39% versus a 9% drop in the S&P.

To gauge which companies the CAPS community thinks offer good opportunities in this region, we'll sort these businesses by their CAPS star rank, from one star to the maximum five. We'll then examine a couple of the companies to find out who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some Brazilian stocks I've gleaned from CAPS today.

Acero caliente!
That's "hot steel," for those not in the know. Although the weather in Brazil generally cools this time of year, the global appetite for steel keeps the heat on a large pool of companies feeding the supply chain for infrastructure projects around the world. In addition, China, one of the world's largest consumers of steel, recently acquiesced to pressure from other nations by increasing export taxes on steel and other metals, in an attempt to manage a spiraling trade gap.

Rated as one of South America's best stocks, steel producer Gerdau can seemingly do no wrong. Despite a sharp increase in sales in its first quarter, Gerdau saw its profits fall by 7.5%, a result of costs from recent acquisitions, including MacSteel and Century Steel, and a strong Brazilian currency. But with expectations for even higher steel prices through 2009, analysts and investors are overlooking the higher expenses at Gerdau and looking forward to even more profits -- and have continued to bid up shares accordingly.

As if the strong organic growth and savvy acquisition spree weren't enough to entice investors, Gerdau even pays investors a nice dividend to hold shares. With consistent growth internally at Gerdau and the seemingly insatiable demand for steel continuing unabated, it's hard to argue with 99% of the 861 CAPS investors rating the Brazilian steelmaker as a market-beating investment.

Worth a premium?
As the steel industry as a whole continues to trade at a discount to the S&P 500, another Brazilian steelmaker, Companhia Siderurgica Nacional (CSN), currently trades significantly higher than its industry peers. But there are significant differences in the way CSN does business -- one that many investors say warrants the premium on shares.

CSN not only manufactures a variety of steel products, but it also mines the ore and strategically invests in rail-transportation and power-supply companies. Taking integration to the extreme, CSN seeks to maintain at least some level of control or have influence over any operation affecting the efficient and profitable production of steel. The company also derives a majority of its revenue domestically -- 80% in the most recent quarter -- where margins are higher.

Even with the premium valuation, the CAPS community generally remains overwhelmingly bullish on CSN, with 96% of the 397 CAPS All-Stars who have rated the company believing it will outperform the S&P in the future.

Lead a horse to water ...
Plucking individual stocks from Brazil or any one country or industry 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 steel offers the best prospects in Brazil? Or has this industry run its course? Give your opinion in Motley Fool CAPS.