ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | July 16, 2012 12:14 pm

ETF Alternatives for Last Week’s Hot Stocks

This past Friday was the hero for markets last week as the S&P 500 rose 1.7% on the day thanks to news in the banking industry that JPMorgan Chase (NYSE:JPM[1]) and Wells Fargo (NYSE:WFC[2]) had good earnings and thanks to 7.6% second-quarter GDP growth. As a result of the good finish, the index was able to eek out a small gain for the week of July 9-13. With that in mind, here are some ETF alternatives to some of our stock picks from last week:

Starting off the week Richard Band was interested in discussing the timing of stock purchases[3] — specifically, that you should buy on pullbacks only. Although it’s difficult with individual stocks to pinpoint when those pullbacks occur, there are short-term technical indicators to suggest when the markets as a whole are overbought.

Band feels the rally since June 1 is a perfect example. He recommends buying Dover Corp. (NYSE:DOV[4]) at slightly lower levels, as it’s one of the most consistent dividend payers anywhere and also has strong earnings growth.

The ETF alternative is the Guggenheim Mid-Cap Core ETF (NYSE:CZA[5]), which seeks to replicate the Zacks Mid-Cap Core Index, an index composed of 100 mid-cap securities chosen by Zacks using a proprietary investment strategy. Dover has a weighting of almost 2% and is a top 10 holding. With an expense ratio of 0.60, Morningstar gives it a 5-star rating from a group of 353 mid-cap value funds.

On Tuesday, Charles Sizemore was recommending investors buy the shares of both Visa (NYSE:V[6]) and Mastercard (NYSE:MA[7]) on any protracted weakness[8]. Sizemore believes the transition to a global cashless society along with the rise of the emerging-market consumer put them in the driver’s seat when it comes to growth.

Even if consumer spending slows, the move to electronic payments continues to gain momentum and Visa and Mastercard are two of the biggest beneficiaries. Visa — which expects to generate more than half its revenue overseas by 2015 — is a perfect way to invest in emerging markets without going direct.

Using this as my parameter for selecting an ETF alternative, I’ll want to pick a domestic fund whose company holdings do business outside the U.S. Although the First Trust US IPO Index Fund (NYSE:FPX[9]) has Visa as its number one holding at 10%, the PowerShares Dynamic Large Cap Growth Portfolio (NYSE:PWB[10]) is the better choice in my opinion because its holdings do far more business  overseas. Plus,Visa and Mastercard’s weightings are each just over 3%.

Midweek, Keith Fitz-Gerald made a very compelling argument why debt-free companies[11] make excellent investments. In 2011, for instance, the top 15 firms based on total cash and short-term investments as a percentage of total assets outperformed the S&P 500 by 1300 basis points. Fitz-Gerald suggests that debt-free companies are better able to adjust to changing economic conditions because they are able to restructure without having to answer to bondholders, etc.

At a time when financial experts recommend that consumers deleverage to the point of eliminating all debt, the same should hold true for business. Of Fitz-Gerald’s four picks, I’m going to find an alternative for CH Robinson (NASDAQ:CHRW[12]), a transportation logistics company, whose cash position is 15% of assets and revenues over the past 20 years are compounding at 16% annually.

Once again I’m going to forego the straightforward choice — iShares Dow Jones Transportation Index Fund (NYSE:IYT[13]) — for something more diversified. The Guggenheim S&P 500 Equal Weight Industrials ETF (NYSE:RGI[14]) is a fund with 61 stocks that seeks to replicate the index of the same name. I’m a big fan of equal weight funds because they avoid the overweighting that tends to occur with popular stocks like Apple (NASDAQ:AAPL[15]).

Corn is also a big topic these days as the summer’s heat wave continues to hammer this year’s crop. Last week, I was busy recommending ETFs to own[16] to take advantage of this unfortunate situation. Daniel Putnam took a different direction last Thursday recommending two diversified meat producers and two chicken processors who should benefit from any news that the crop numbers aren’t as gloomy[17] as everyone thinks. It’s very contrarian.

In order to protect oneself from what I feel is the inevitable rise in feed costs, it’s better to go with something more diversified like the First Trust Consumer Staples AlphaDEX Fund (NYSE:FXG[18]), which holds two of the four stocks: Smithfield Foods (NYSE:SFD[19]) at 4% and Tyson Foods (NYSE:TSN[20]) at 3%. It’s a little expensive at 0.70%, but will do a much better job of protecting on the downside than something like the IQ Global Agribusiness Small Cap ETF (NYSE:CROP[21]).

Closing out the week Ethan Roberts was high on small-cap juice retailer[22] Jamba Juice (NASDAQ:JMBA[23]) who, despite having more false starts than a bad 100 meter race at the Olympics, is looking to benefit from its recent contract to put JamboGo kiosks in 400 to 500 schools across America by the end of 2012.

This may be the solution to its problems. For those who are not familiar with Jamba Juice, it’s racked up $428 million in operating losses over the past five years. In fairness, the loss in the first quarter was just $1.6 million on $53 million in revenue, so its business is definitely getting better. And Roberts did refer to it as a turnaround.

As for ETF alternatives, any way you slice it you’re not going to find a fund that holds a large amount of Jamba. Therefore, because it’s a micro-cap, my best suggestion is the iShares Russell Microcap Index Fund (NYSE:IWC[24]), which holds 1358 stocks including Jamba at 0.08%. Micro-caps can be very volatile so owning an ETF like this makes an excellent substitute.

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

Endnotes:
  1. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  2. WFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFC
  3. timing of stock purchases: http://investorplace.com/2012/07/pay-less-earn-more-on-your-investments-oxy-dov/
  4. DOV: http://studio-5.financialcontent.com/investplace/quote?Symbol=DOV
  5. CZA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CZA
  6. V: http://studio-5.financialcontent.com/investplace/quote?Symbol=V
  7. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  8. any protracted weakness: http://investorplace.com/2012/07/visa-mastercard-v-ma-credit-cards-emerging-markets/
  9. FPX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FPX
  10. PWB: http://studio-5.financialcontent.com/investplace/quote?Symbol=PWB
  11. debt-free companies: http://investorplace.com/2012/07/four-debt-free-companies-to-own-if-the-markets-tank-and-even-if-they-dont-rgr-aapl-ma-chrw/
  12. CHRW: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHRW
  13. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT
  14. RGI: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGI
  15. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  16. recommending ETFs to own: http://investorplace.com/2012/07/corns-pain-could-be-these-etfs-gain/
  17. crop numbers aren’t as gloomy: http://investorplace.com/2012/07/4-stocks-to-buy-for-a-corn-trade/
  18. FXG: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXG
  19. SFD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SFD
  20. TSN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSN
  21. CROP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CROP
  22. small-cap juice retailer: http://investorplace.com/2012/07/juice-up-your-portfolio-with-this-turnaround/
  23. JMBA: http://studio-5.financialcontent.com/investplace/quote?Symbol=JMBA
  24. IWC: http://studio-5.financialcontent.com/investplace/quote?Symbol=IWC

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