ETF Teardown: India'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 the prospects in India, for example, they can turn to the iPath MSCI India ETF (INP).

Since this ETF invests in a number of stocks, it gives you a broad diversity that also limits your upside. For an investor who was, say, really hip to Indian banking companies but cold to the future prospects of information technology (IT) services, this ETF wouldn't fit the bill.

Fear not, gentle Fools. In this edition of "ETF Teardown," we'll use some nifty tools to drill into the best of what India 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 4,300 rated stocks that are profiled in CAPS can be "tagged" with a descriptor that groups the company with others that share a certain quality.

Selecting the "India" tag in CAPS presents a list of more than 19 Indian investments -- one of them being the iPath MSCI India ETF -- that trade on American exchanges. This particular collection of investments has failed to match broader market returns in the past year, up only 4.5% versus the S&P gain of 13.2%.

But some investors think that particular Indian companies still hold tremendous potential for growth. To get a sense of which companies the CAPS community thinks are the best opportunities in India today, we can sort this list by their CAPS star rank, denoted by one to five stars, with five being the best. Each of the individual companies can then be viewed for 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 of the five-star stocks our screen pulled up today.

In looking at what the CAPS community favors in India, a few industries stand out, like banking. With the flourishing economy and middle class in India, banks are growing like gangbusters. India's largest bank, $19 billion ICICI, saw revenues nearly double to $5.8 billion in fiscal 2006, as more customers applied for mortgages and flocked to credit cards. The second-largest private bank, HDFC, is consistently growing earnings at a greater than 30% clip as well.

While growth is not a problem for these large banks, a good price to pay for stock in either company is another story. While bulls outnumber bears of both banks by greater than 30-to-1, some think the stocks are too expensive to warrant purchase at the current price. Yet solid growth to date and positive outlook for Indian economic growth has kept the majority of investors bullish on these companies, even at the risk of a correction in the pricey Indian market.

Another area with companies getting five-star ranks is in the popular business of Internet and IT services. Fast-growing Sify provides Internet and e-commerce services to a rapidly growing base of tech-savvy Indians. While the $350 million company is still struggling to turn a profit, bullish CAPS investors give high marks to an experienced CEO with high ownership of the company.

And while Satyam Computer Services is less than half the size of IT consulting giants like Wipro (NYSE:WIT) and Infosys, the $8 billion provider of outsourced enterprise applications is growing revenues at a 30% annualized rate. CAPS players like the prospects of a smaller, nimbler player in the booming Indian corporate services sector; 277 of the 280 players pick the company to outperform the S&P. Investors also think Satyam's digestible size makes it a potential target for a global player like IBM (NYSE:IBM).

You can lead a horse to water ...
Plucking individual stocks from an emerging market such as India 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 on a stock.

So do you agree that banking is the best place to be in India? Or are the Internet and IT services companies better positioned to outgrow the market? Give your own opinion in Motley Fool CAPS.

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Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.