ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | October 31, 2012 12:35 pm

Last week was another bad one for the S&P 500, which fell 1.5% between Oct. 22 and Oct. 26. The cause? Corporate results are severely disappointing investors so far in the Q3 reporting season.

Slightly less than 40% of S&P 500 companies reporting so far have exceeded expectations, compared to a historical average around 60%. Even Amazon (NASDAQ:AMZN[1]) delivered weaker-than-expected earnings[2], prompting many to speculate that the bull run is over.

Regardless, a few bulls still are out and about. InvestorPlace contributors were hard at work providing readers with some plausible stock ideas. Here are a few ETF alternatives to those stocks that can offer a little protection via diversification:

Housing Stocks

My first alternative comes from James Brumley’s Oct. 22 article highlighting stocks within the equipment rental, home fixtures and mortgage lending industries. Rather than purchasing an overbought homebuilder, Brumley suggested some stocks within all three industries that investors can use to play the housing rebound[3].

Whenever I recommend an ETF alternative, I like to suggest something where the stock in question is a top 10 holding. Out of the 10 stocks mentioned in the article, Fortune Brands Home & Security (NYSE:FBHS[4]) provides the most appealing ETF alternative in the Guggenheim Spin-Off ETF (NYSE:CSD[5]), a fund that seeks to replicate the performance and holdings of the Beacon Spin-Off Index — a group of up to 40 stocks that have been spun off from their parent no earlier than six months prior to reconstitution (semi-annually) and no later than 30 months prior.

Potential stocks are ranked using a 100% quantitative rules-based methodology, then given a modified market cap weighting with a maximum 5%, though the weight occasionally can drift higher until the next reconstitution. FBHS currently is the sixth-largest holding of 25 stocks at 5.14%. For those fixated on price, its annual expense ratio is high at 0.6%.

Toy Stocks

Next up is InvestorPlace Editorial Assistant Alyssa Oursler, who discussed the pros and cons of owning Mattel (NASDAQ:MAT[6]) and Hasbro (NASDAQ:HAS[7]). While Oursler slightly favors Hasbro[8] because of its greater commitment to technology, I believe Mattel makes more sense given its stronger third-quarter earnings. Further, its diversification beyond Barbie will keep it growing at a faster rate than its smaller rival.

The ETF best suited as an alternative to Mattel is the iShares Morningstar Mid Core Index Fund (NYSE:JKG[9]), which (as the name suggests) invests in mid-cap stocks intended for the core of your portfolio. With a total of 183 holdings — including Mattel in the No. 1 spot, with a weighting of 1.38% — it’s a good way to add some performance to an otherwise conservative portfolio. At 0.25%, its annual expense ratio is easy on the pocketbook.

Apple

My brother recently asked me whether he should sell Apple (NASDAQ:AAPL[10]), which seems to be in free fall. I told him I thought Apple had lots of good stuff in development or just being introduced into the market, so it should be fine. The real test for CEO Tim Cook will be a couple of years from now, when all the influence of Steve Jobs will have disappeared from Cupertino. Then it will be solely on him.

InvestorPlace contributor Jonathan Berr wrote Oct. 23 that both Apple and CBS (NYSE:CBS[11]) face better prospects ahead[12], and although Apple’s more of a gamble, both have price-to-earnings ratios close to five-year lows. Finding an ETF to capture Apple in the top 10 holdings is almost as easy as finding a slot machine in Vegas; finding both in the top 10 is nonexistent.

Your best bet under the circumstances is the PowerShares Dynamic Large Cap Growth Portfolio (NYSE:PWB[13]), which owns 50 large-cap stocks, including Apple at 3.02% and CBS at 1.29%. PWB has outperformed the S&P 500 by about 3 percentage points year-to-date.

Hotel Stocks

Hotels were on the mind of Lawrence Meyers on Oct. 24. Two things in particular: The first is that hotel demand in 2013 is expected to rise 2.9% versus a 1% increase in supply. This gives hotels pricing power, which improves occupancy rates and revenue per available room. Secondly, stealth inflation should enable it to continue raising prices for some time. The net result: steady, stable growth for the hotel industry.

Rather than pick one of the six hotel-related stocks[14] Meyers provides, I suggest the PowerShares Dynamic Leisure Entertainment Portfolio (NYSE:PEJ[15]), which owns Marriott International (NYSE:MAR[16]), Starwood Hotels & Resorts (NYSE:HOT[17]) and Marriott Vacations Worldwide (NYSE:VAC[18]) in its top 10, with all three weightings above 3%. Investing in 30 of the top leisure and entertainment companies in the U.S., PEJ’s only negative is an annual expense ratio of 0.63%, which is high for a passive index fund — albeit one that takes into account several investment criteria.

Ingersoll-Rand

Lastly, I’m going back to Lawrence Meyers and his Oct. 25 pick of Ingersoll-Rand (NYSE:IR[19]), the quasi-conglomerate with familiar brands[20] like American Standard, Schlage, Trane and Club Car. Meyers likes its free cash flow, which totaled $940 million in 2011. If you’re a Warren Buffett fan, you’re probably not interested in IR because Berkshire Hathaway (NYSE:BRK.B[21]) unloaded the remainder of its position in the first quarter of 2012.

Those of you sitting on the fence are better off investing in the PowerShares Dynamic Building & Construction Portfolio (NYSE:PKB[22]), which invests in 30 U.S. building and construction companies including Pool Corp. (NASDAQ:POOL[23]) and Nacco Industries (NYSE:NC[24]), two companies I’ve liked for several years.

Having gone to a third PowerShares fund that replicates an Intellidex index, I hope I haven’t gone to the well once too often.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. delivered weaker-than-expected earnings: http://investorplace.com/2012/10/amazon-disappoints-but-touts-its-tablets/
  3. play the housing rebound: http://investorplace.com/2012/10/3-ways-to-play-housing-without-betting-on-homebuilders/
  4. FBHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FBHS
  5. CSD: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSD
  6. MAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAT
  7. HAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAS
  8. slightly favors Hasbro: http://investorplace.com/2012/10/toy-maker-throwdown-hasbro-vs-mattel/
  9. JKG: http://studio-5.financialcontent.com/investplace/quote?Symbol=JKG
  10. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  11. CBS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CBS
  12. better prospects ahead: http://investorplace.com/2012/10/apple-and-cbs-are-too-cheap-to-ignore/
  13. PWB: http://studio-5.financialcontent.com/investplace/quote?Symbol=PWB
  14. six hotel-related stocks: http://investorplace.com/2012/10/hotel-stocks-offer-safe-harbor-and-yield-during-tough-times/
  15. PEJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEJ
  16. MAR: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAR
  17. HOT: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOT
  18. VAC: http://studio-5.financialcontent.com/investplace/quote?Symbol=VAC
  19. IR: http://studio-5.financialcontent.com/investplace/quote?Symbol=IR
  20. quasi-conglomerate with familiar brands: http://investorplace.com/2012/10/boring-and-undervalued-perfect/
  21. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B
  22. PKB: http://studio-5.financialcontent.com/investplace/quote?Symbol=PKB
  23. POOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=POOL
  24. NC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NC

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