by Will Ashworth | November 19, 2012 1:21 pm
The stock markets appear to be giving away all of their hard-earned gains as the fiscal cliff approaches. The S&P 500 lost 1.45% for the week of Nov. 12-16. The benchmark now sits up 8.13% year to date. In the span of two months it has lost 44% of its value.
Despite the uncertainty facing the markets recently, InvestorPlace contributors are still hard at work finding good stocks for readers to invest in. Here are my weekly exhange-traded-fund alternatives for those stocks.
Share repurchases — I’ve never liked them. Companies usually pay too much for their own stock. However, Louis Navellier[1] makes several arguments for why stock buybacks[2] are a good thing in his Nov. 15 article, including the fact earnings per share increase as a direct result of those buybacks. Furthermore, with the possibility that dividends will be taxed as ordinary income in 2013, share repurchases have become even more attractive to investors and companies alike.
If you do like share repurchases, the best way to take advantage from an ETF perspective is to buy the PowerShares Buyback Achievers Portfolio (NYSE:PKW[3]), a group of 242 holdings, all of which have repurchased at least 5% of their stock in the past 12 months. Since its inception in December 2006, PKW has achieved an annual return of 4.03%, significantly higher than the 2.4% from the S&P 500. While its expense ratio is high at 0.71%, its performance more than makes up for the high fee.
Fans of consumer discretionary stocks, which I am, will love this fund because 35% of the portfolio is invested in stocks like Walt Disney (NYSE:DIS[4]) and Time Warner (NYSE:TWX[5]).
InvestorPlace feature writer Dan Burrows[6] is very impressed with Hertz (NYSE:HTZ[7]), especially now that the Federal Trade Commission will approve its $2.6 billion deal[8] to buy Dollar Thrifty (NYSE:DTG[9]). That makes Hertz a $10 billion business in terms of revenues with 10,000 locations worldwide. The interesting thing about Hertz and Avis Budget (NYSE:CAR[10]), its biggest competitor, is that both are trading well below their historical norm. With less industry competition due to the consolidation, there’s more profits to be made by both firms.
An easy way to benefit from this reduced competition while also gaining exposure to other transportation names is through the SPDR S&P Transportation ETF (NYSE:XTN[11]), which seeks to replicate the performance of the S&P Transportation Select Industry Index, a group of 37 holdings that includes both Hertz and Avis, each with weightings between 3% and 4%. At 0.35%, XTN’s expense ratio is more than palatable.
Most investors have probably noticed that utilities stocks have taken a kicking in 2012[12]. Year-to-date through Nov. 15, the 32 companies that make up the S&P 500s utilities sub-sector are down 5.1%, the worst performance among the 10 sub-sectors that make up the S&P 500.
Richard Band[13], editor of Profitable Investing, suggests that utility stocks relative to corporate bonds are cheaper than they’ve been in 38 years. That’s an awfully long time. Band recommends Duke Energy (NYSE:DUK[14]) and Southern Co. (NYSE:SO[15]) as the stocks to own.
Investors looking for an ETF alternative to take advantage of the historically low valuations have several good options. However, I’d go with the Utilities Select Sector SPDR Fund (NYSE:XLU[16]), which is nice and cheap at 0.18% and has Duke and Southern weighted at 9.34% and 8.82%, respectively.
Lastly, we can’t forget about dividends. The XLU’s 30-day SEC yield is 3.9%. Even if the tax on dividends increases in 2013, the return is still much better than a high-interest savings account.
Following on the heels of a couple of good dividend-paying stocks[17], InvestorPlace contributor Ethan Roberts[18] recommends investors take a look at Cliffs Natural Resources (NYSE:CLF[19]), a producer of iron ore and coal, whose stock has lost 60% of its value since July 2011 and now yields close to 7%. Cliffs raised its quarterly dividend in April to 62.5 cents per share from 28 cents, and although its payout is just 39%, Roberts does wonder whether Cliffs can maintain the dividend if its earnings continue to deteriorate.
Overall, I think his investment premise is a good one. Cliffs sells a lot of iron ore to steel producers. The Van Eck Market Vectors Steel ETF (NYSE:SLX[20]) will get you 27 steel-related businesses, including Cliffs at a weighting of 4.27%. Its dividend yield is a respectable 3.26%, although its expense ratio of 0.55% is a tad high for the additional risk you’ll bear. If yield is your most important concern, I’d be more inclined to buy the utilities SPDR from the previous paragraph.
Lastly, InvestorPlace contributor James Brumley[21] took on controversy Nov. 13, suggesting a wrongful death lawsuit[22] currently before the courts as well as an earnings miss shouldn’t be enough to slow Monster Beverage (NASDAQ:MNST[23]) in the long term. However, the energy drink producer faces an uncertain future until its lawsuit is heard and dealt with, and the federal and state governments decide how to tackle the difficult issue of caffeine consumption by children.
Until all of this is taken care of, MNST stock is basically dead money. So, to bet on Monster without parking your money indefinitely, consider buying the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (NYSE:RHS[24]), which invests in 42 consumer staples stocks from the S&P 500, on an equal weight rather than a market cap basis. Monster is weighted at 2.06%, only 59 basis points less than Con Agra Foods (NYSE:CAG[25]), the No. 1 holding. Coca-Cola (NYSE:KO[26]), which distributes Monster and will someday likely buy it, is weighted at 2.34%.
For an expense ratio of 0.50%, you can get some protection against company risk, which in the short term is very high for Monster.
As of this writing, Will Ashworth didn’t own a position in any securities mentioned here.
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