by Will Ashworth | January 22, 2013 9:26 am
Well, chalk up another good week for stocks. The S&P 500 gained almost a full percent Jan. 14-18. And with less than a month in the books for 2013, the index is up 4.2% year-to-date and just 5% off its all-time high.
Investors not wanting to miss out on the next leg up were in a buying mood last week, and InvestorPlace contributors were more than happy to provide them with ideas. Here are my ETF alternatives to their buy recommendations:
At the beginning of the week, Johnson Research Group examined the biggest percentage changes in the short interest of S&P 500 companies. At the top of the list was Stanley Black & Decker (NYSE:SWK), which has seen a 68% increase in the number of shares short through Dec. 31. SWK’s fourth-quarter earnings are expected to be about the same or even a bit less than last year’s, so any good news when it reports on Jan. 24, should send shorts scurrying to exit their positions.
A good way to play SWK is through the Guggenheim S&P 500 Equal Weight Industrials ETF (NYSE:RGI), which consists of the 60 industrial stocks in the S&P 500. With total net assets of $18.8 million, it’s always possible that the fund could close at some point. However, Guggenheim has 17 equal-weight funds and is committed to this philosophy of investing. Personally, I like equal-weight funds because they provide true diversification, unlike market-cap-weighted funds, which often are really just investments in the top 10 holdings.
On Jan. 15, Lawrence Meyers excitedly discussed PriceSmart (NASDAQ:PSMT), the largest operator of warehouse clubs in Latin America. PriceSmart operates 30 stores in 12 countries, including five in Costa Rica, four in Panama and three in the Dominican Republic. With smaller stores and lower membership fees than in the U.S., the Price family — who founded Price Club — has successfully exported the warehouse concept to Latin America. As a result, its stock is on fire, trading within 9% of its $86 all-time high.
Meyers thinks you should wait for a significant pullback. For those who can’t wait, here’s an easy alternative.
The SPDR S&P Retail ETF (NYSE:XRT) is a modified equal-weight fund that seeks to replicate the performance of the S&P Retail Select Industry Index. It consists of 98 holdings, including PriceSmart at a weighting of 1.05% — 46 basis points lower than the top holding and 65 basis points higher than the bottom holding. The discrepancy is due to the fact XRT is a modified equal-weight fund that uses several criteria to create each of the holding’s weightings. At a 0.35% expense ratio, it’s a great way to own the retail sector.
Some of you must have thought James Brumley lost his mind Jan. 16, recommending DeVry (NYSE:DV), one of those for-profit schools that’s clinging desperately to life. The problem for many of these companies is their former students are defaulting on loans because they can’t find work. If the default rate continues to rise, many of these schools will lose their ability to recruit new students due to a two-year withholding of government student loans. It’s a lethal blow to many.
However, Brumley feels DeVry is an exception because it’s providing students with practical skills like nursing and law enforcement rather than liberal arts. I tend to agree with his assessment.
Nonetheless, if you want to hedge, your best bet is the First Trust Consumer Discretionary AlphaDEX Fund (NYSE:FHD), which comprises 125 holdings, including DeVry at a weighting of 1.34%. Using growth and value factors, the fund picks its stocks from the Russell 1000. Although the StrataQuant Consumer Discretionary Index, which the fund replicates, is equally weighted, it’s done so by quintile. Therefore, the stocks ranked in the top 25% of the holdings will get a higher weighting than those in the second quintile, etc.
The big downside here is the 0.7% expense ratio. However, if you believe the economy will get stronger, this is an excellent group of holdings to ride the recovery.
Tom Taulli discussed eBay’s (NASDAQ:EBAY) fourth-quarter results Jan. 17. The e-commerce company’s report highlighted how well it’s doing in the mobile market — far better than expected.
Investors haven’t missed the fact eBay has been able to profit from the rapid growth of the mobile market, knocking its stock up 78% in the past year. Taulli figures EBAY is fairly valued at the moment, but he believes it will continue to gain. In other words, it’s a good long-term buy.
The only downside involved with most of the ETF alternatives for eBay is that they generally come with high annual expense ratios. Therefore, rather than come up with some idea that gets you in on the cheap but sacrifices weighting, I’m going to recommend the PowerShares NASDAQ Internet Portfolio (NASDAQ:PNQI), which has eBay as the third-largest holding at 7.68%. More important, the top 10 holdings account for 60% of its $52 million in total net assets. This is definitely a more focused investment.
Closing out the week, Aaron Levitt suggested five ways to benefit from the growth in domestic energy outside the traditional exploration and production companies. Of those five, I believe Lufkin Industries (NASDAQ:LUFK) has the best balance amont consistent revenue generation, profitability and potential growth. Although its stock is just 1% below its 52-week high, it’s also 71% off its five-year high, so it appears to have good appreciation potential in the future.
I’m headed back to PowerShares once again and recommending the PowerShares S&P SmallCap Energy Portfolio (NASDAQ:PSCE), which has Lufkin at a weighting of 8.81%, its third-largest holding out of 23 stocks. This fund also holds another of Levitt’s picks — Exterran Holdings (NYSE:EXH). The ETF’s expense ratio is a respectable 0.29%. If you believe in energy, this is a good fund to own.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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