ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | March 4, 2013 1:08 pm

The S&P 500 closed the past week up 0.2% at 1518.20 and within 3% of 1565, its all-time high. That’s the good news. The bad news is that a lot of the stocks within the index aren’t showing much pop right now, making it that much harder to predict who the winners will be. Nonetheless, InvestorPlace contributors were busy coming up with stock ideas. Here are my ETF alternatives.

The day before Vitamin Shoppe (NYSE:VSI[1]) released its fourth-quarter earnings[2], Jim Woods spoke enthusiastically about the supplement retailer. Woods felt traders could make a quick 15% pop off the good news to come. Unfortunately, it didn’t play out that way, as earnings per share missed analyst estimates by $0.08, causing the shares to tumble 19%. (To Jim’s credit, he recommended a tight 8% stop-loss.) As for the company itself, I too am a believer[3] and feel this recent dip provides investors with an excellent entry point.

However, if you’re not so sure, you can always buy an ETF that gives you a little exposure to the stock while maintaining a decent amount of diversification. While I’m tempted to recommend the PowerShares S&P Small Cap Consumer Discretionary ETF (NASDAQ:PSCD[4]) because Vitamin Shoppe’s a top-10 holding at 1.90%, my sensible side suggests you go with the SPDR Retail (NYSE:XRT[5]), which is a group of 98 retail-related stocks that includes rival GNC Holdings (NYSE:GNC[6]) in its top 10 holdings. Go beyond the top 10 and you get a lot of great retailers. Vitamin Shoppe’s weighting is 0.91%, 29 basis points less than GNC. Long-term, XRT this has been a stellar performer.

Jeff Reeves, editor of The Slant, isn’t a fan of stock buybacks[7] – and neither am I. We’ve seen too many instances of companies buying back their stock at the absolute top to be anything but cynical. However, as Jeff points out, there are arguments to be made that share repurchases are a bullish sign vaulting a stock higher. Lots of companies have announced billion-dollar buybacks recently, including Home Depot’s (NYSE:HD[8]) $17 billion plan through 2015. In all, the market saw $300 billion in share repurchases announced in 2012 — no small sum.

If you believe that the increase in share repurchase announcements is a bullish sign, the best and easiest way to benefit is to buy the PowerShares Buyback Achievers Portfolio (NYSE:PKW[9]), which tracks the Nasdaq Buyback Achievers Index, a group of companies who’ve bought back at least 5% of their outstanding shares in the trailing 12 months. Currently 209 holdings strong, the ETF is reconstituted every January and rebalanced in January, April, July and October. The fund is weighted toward large-caps, but all cap sizes are represented — mid-caps and small-caps make up 29.5% and 8.0%, respectively. Since inception in December 2006 it has achieved an annualized total return of 3.84%, 161 basis points higher than the S&P 500. On the downside, the fund trailed its benchmark index by 83 basis points, due in part to an annual expense ratio of 0.71%.

On the final day of February, Hilary Kramer suggested that investors in General Mills (NYSE:GIS[10]) take some of their profits off the table[11]. It’s had a good run, up 26% in the past year through March 1 and within 1% of an all-time high. Kramer reasons that rising commodity costs are likely going to eat into cereal profits, a big portion of their business. However, Kramer generally favors the company and believes buying back when prices are lower and inflation’s subsided. While that’s rational advice for sure, it’s not always easy for the little guy to follow.

For those who don’t trust themselves to take profits and want to own General Mills, you’re better to play its stock through the PowerShares Dynamic Food & Beverage Portfolio (NYSE:PBJ[12]), a collection of 30 stocks in the food and beverage space. General Mills is the fourth-largest holding at 4.99%, behind just Monsanto (NYSE:MON[13]), Hershey (NYSE:HSY[14]) and Mondelez International (NASDAQ:MDLZ[15]). One thing to keep in mind: PBJ’s 12-month yield clocks in at just 1.42%. If you’re interested in General Mills solely for its dividend yield, you probably are better off investing in one of the many dividend ETFs available.

Being Canadian, I just had to mention Aaron Levitt’s March 1 article recommending Suncor Energy (NYSE:SU[16]). As Aaron points out, being a tar sands producer[17] at the moment is like being a Red Sox fan at Yankee Stadium … not very popular. With shale oil and natural gas so easy to get out of the ground, the dirty stuff Alberta produces simply is simply not in demand. At least for now. Once pipelines are built that can transport the oil south and west, the price it obtains will be much higher. Long-term, Aaron sees a winner that’s currently on sale.

If you feel as Aaron does that Suncor is a good long-term play but are unsure in the near term, you could always bet on Canada as a whole and buy the iShares Canada ETF (NYSE:EWC[18]), which has 98 holdings including Suncor at a weighting of 3.71%. The energy sector represents 25% of the $4.7 billion in total net assets, so there are many other oil plays in the mix. Financials represent an even bigger portion at 36% of the portfolio. At 0.51%, its expense ratio gives you good international exposure.

Once upon a time a long time ago I was in sales — I wasn’t very good at it so I moved on to other endeavors. But I still believe that good sales people are never without work. The same goes for debt collectors[19]. It can’t be easy to ask people over and over for the money they owe. Yet that’s exactly what Portfolio Recovery Associates (NASDAQ:PRAA[20]) does. It picks up defaulted debt on the cheap and then tries to recover it. The debt is cheap for a reason. Yet Lawrence Meyers pointed out March 1 that the Virginia-based company makes a very good living in this business. PRAA is a classic Peter Lynch business.

You can pick up a financial ETF if you want to get some exposure to Portfolio Recovery Associates. However, I’m more interested in the small-cap aspect of this stock. The iShares Core S&P Small-Cap ETF (NYSE:IJR[21]) basically replicates the performance of the S&P SmallCap 600 index, which represents approximately 3% of the U.S. equity markets. Eligible stocks are between $300 million and $1.4 billion in market capitalization with reasonable liquidity. You’ll notice that PRAA’s current market cap is $2 billion, significantly higher than its intended range — and that’s a good thing. Prior to its 58% gain in 2012, PRAA fit neatly into the small-cap category. Ideally you want all your small-caps to become mid-caps.

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

Endnotes:
  1. VSI: http://studio-5.financialcontent.com/investplace/quote?Symbol=VSI
  2. fourth-quarter earnings: http://investorplace.com/247trader/a-vitamin-stock-to-make-your-trading-portfolio-healthy/
  3. I too am a believer: http://investorplace.com/2012/11/supplement-your-income-with-this-stock/
  4. PSCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSCD
  5. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  6. GNC: http://studio-5.financialcontent.com/investplace/quote?Symbol=GNC
  7. stock buybacks: http://slant.investorplace.com/2013/02/stock-buyback-boom-continues/
  8. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  9. PKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=PKW
  10. GIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GIS
  11. profits off the table: http://investorplace.com/2013/02/lock-in-gains-in-general-mills/
  12. PBJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBJ
  13. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  14. HSY: http://studio-5.financialcontent.com/investplace/quote?Symbol=HSY
  15. MDLZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDLZ
  16. SU: http://studio-5.financialcontent.com/investplace/quote?Symbol=SU
  17. tar sands producer: http://investorplace.com/2013/03/snatch-up-this-oil-sands-energy-producer/
  18. EWC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWC
  19. debt collectors: http://investorplace.com/2013/03/my-second-cheapest-stock-is-up-20-heres-why/
  20. PRAA: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRAA
  21. IJR: http://studio-5.financialcontent.com/investplace/quote?Symbol=IJR

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