ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | June 25, 2012 2:13 pm

ETF Alternatives for Last Week’s Hot Stocks

Global economic uncertainty caused a drop in the markets last week, but it wasn’t all bad news. While the S&P 500 was down, the Russell 2000 and tech-laden Nasdaq each managed to make slight gains.

Mixed around in this quagmire were some stocks discussed by InvestorPlace contributors during the past week, including those from the retail, pharmaceutical, technology and freight services industries. Here are some ETF alternatives to those recommendations:

Pharmaceuticals

Starting off the week, James Brumley explored the strongest names in pharmaceuticals[1].

Not making the grade were two holdings of Berkshire Hathaway (NYSE:BRK.B[2]): Johnson & Johnson (NYSE:JNJ[3]) and GlaxoSmithKline (NYSE:GSK[4]). At the top of Brumley’s list are Bristol-Myers Squibb (NYSE:BMY[5]) and Eli Lilly & Co. (NYSE:LLY[6]), both hurt in the past by underperformance. Doing better these days, both companies appear to have room left to run.

The best way to own Brumley’s two favorites without getting many of those that didn’t make the cut is to buy the Russell High Dividend Yield ETF (NYSE:HDIV[7]), which owns both in its top 10. Of the six that didn’t make Brumley’s cut, J&J and Merck (NYSE:MRK[8]) are the only ones in the top 10. With 75 dividend-paying stocks in the fund paying an SEC 30-day yield of 4.04%, it’s an excellent way to capture the best in pharmaceuticals while also generating reasonable income.

Microsoft

Tom Taulli made an interesting observation Tuesday when he stated that Apple’s (NASDAQ:AAPL[9]) stock is up 376% since the introduction of the iPhone in 2007 while Microsoft’s (NASDAQ:MSFT[10]) is essentially unchanged. Despite the damning evidence, Taulli believes that the Surface tablet[11] will bring new growth to the long-in-the-tooth tech veteran.

A good way from an ETF perspective to play Microsoft is to buy the WisdomTree LargeCap Growth Fund (NYSE:ROI[12]), which seeks to match the performance of the WisdomTree LargeCap Growth Index, a fundamentally weighted index based on earnings. Microsoft is the third largest holding behind only Apple and Exxon Mobil (NYSE:XOM[13]). Technology stocks represent 35% of the portfolio, including Microsoft at 7.85%. Its three-year annual return is 11.4%, significantly below the S&P 500 and large growth funds. Do I think it can reverse its lack of performance in the coming years? Yes. Do I think it will? That’s up to Mr. Market.

PetSmart

At midweek, Louis Navellier was interested in specialty retail. At the top of his list was PetSmart (NASDAQ:PETM[14]), whose dividend increase of 18% and $525 million share repurchase announcement along with excellent fundamentals make it a good stock to buy[15]. Personally, I sometimes wonder if supporters of its stock actually visit the stores. If they did, they’d know that PetSmart runs on minimum inventory, which is great for profits but not so good for customers, like myself, who spend more time coming and going because they’re always out of stock. Eventually, someone is going to figure out how to service owners of multiple pets.

However, if you find yourself on Navellier’s side of the fence, I’d look at the iShares MidCap 400 Growth Index Fund (NYSE:IJK[16]), which has PetSmart in its top 10 holdings, has $2.8 billion in net assets and charges 0.26% annually. If mid-caps aren’t your thing, but retail is, then the better buy is the SPDR S&P Retail ETF (NYSE:XRT[17]) instead. Its expense ratio is only 9 basis points higher and it includes 98 of the biggest names in retail.

FedEx

On Thursday, Lawrence Meyers pointed out that despite FedEx (NYSE:FDX[18]) delivering mediocre fourth-quarter earnings and disappointing first-quarter guidance[19], its stock still is worth owning. Even though the global economy is sucking gas, its pristine balance sheet, combined with an ability to raise prices, should allow it to weather any storm better than most. Of all the picks I’m writing about this week, FedEx is the one I’d actually consider owning.

Therefore, because I like FedEx and would want a higher weighting in any ETF alternative, I have to go with the iShares Dow Jones Transportation Average Index Fund (NYSE:IYT[20]). FedEx is the No. 2 holding at 9.65%, with United Parcel Service (NYSE:UPS[21]) in third at 8.4%. There are only 21 holdings, with railroads, shipping, airlines and trucking lines also represented. The only drawback is the expense ratio, which at 0.47%, is a little high.

Bed Bath & Beyond

Closing out the week I’m headed back to Louis Navellier, who believes home furnishings retailer Bed Bath & Beyond (NASDAQ:BBBY[22]) is a good buy thanks to the market’s overreaction to its second-quarter earnings estimates[23]. Recently, Bed Bath & Beyond bought Cost Plus, which should bolster its profits down the road. If I had a choice between this stock or PetSmart, I’d definitely go with Bed Bath & Beyond.

Your best bet from an ETF perspective is the SPDR S&P Homebuilders ETF (NYSE:XHB[24]), which has an emphasis on homebuilders. However, there are some retailers in the holdings, including Bed Bath & Beyond at 2.94%. I realize it’s still hard to bet on housing at this point, but if you’re a contrarian investor, this could work out for you on two fronts.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

Endnotes:
  1. strongest names in pharmaceuticals: http://investorplace.com/2012/06/dont-buy-pharma-stocks-buy-these-pharma-stocks/
  2. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  3. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  4. GSK: http://studio-5.financialcontent.com/investplace/quote?Symbol=GSK
  5. BMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMY
  6. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  7. HDIV: http://studio-5.financialcontent.com/investplace/quote?Symbol=HDIV
  8. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  9. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. Surface tablet: http://investorplace.com/2012/06/should-i-buy-microsoft-3-pros-3-cons/
  12. ROI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ROI
  13. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  14. PETM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PETM
  15. good stock to buy: http://investorplace.com/2012/06/petsmart-a-best-in-show-stock-buy-petm-inch-tgt-wmt/
  16. IJK: http://studio-5.financialcontent.com/investplace/quote?Symbol=IJK
  17. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  18. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  19. disappointing first-quarter guidance: http://investorplace.com/2012/06/fedex-its-not-all-rain-from-a-cloudy-outlook/
  20. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT
  21. UPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UPS
  22. BBBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBBY
  23. second-quarter earnings estimates: http://investorplace.com/2012/06/186641-bbby-wmt-pir-tgt-m/
  24. XHB: http://studio-5.financialcontent.com/investplace/quote?Symbol=XHB

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