Snatch Up Small Caps: ETF Alternatives for Hot Stock Picks

by Will Ashworth | May 20, 2013 3:05 am

Snatch Up Small Caps: ETF Alternatives for Hot Stock Picks

Well, the S&P 500 just keeps on climbing. The index gained over 2% last week, closing at another all-time high. In this kind of environment, throwing darts at a board would be successful.

Nonetheless, InvestorPlace contributors were busy selecting stocks with a little extra pop. Here are my ETF alternatives to those recommendations.

Sysco

A good place to start is with Johnson Research Group’s article about some of the best short squeeze trading opportunities[1] available. Of the 14 stocks the piece looked at, a trio was recommended, including Sysco (SYY[2]) — the food service provider whose sales have grown from $115 million in 1970 when it went public to $42 billion in fiscal 2012. Working with restaurants, hotels, hospitals and many other large food service operations, the company’s figured out how to make money in a business known for thin margins. With 32.5 million shares short and 31% of analysts recommending investors sell its stock, this looks like a stock that’s ready for a squeeze.

While there are other ETFs with larger weightings in Sysco’s stock, the Guggenheim S&P 500 Equal Weight Consumer Staples ETF (RHS[3]) is still the cheapest and most sensible way to play it. Sysco is heavily shorted, which means that many investors believe its stock is primed for a fall. By purchasing the RHS, you’re buying 42 of the finest consumer staples stocks in the country to protect against the shorts being right. Rebalanced quarterly, the ETF harvests gains as they happen rather than developing a seriously overweight position in the top two or three holdings. At 0.50%, you’re paying slightly more than average for your fund management but it’s definitely worth it. In the past five years, it’s beaten the S&P 500 by 772 basis points on an annualized basis.

Trinity Industries

Aaron Levitt reminded investors that the hydraulic tracking revolution[4] is forcing refiners of natural gas and shale oil to come up with alternative methods of getting the product to their refineries and then back to buyers. Tank barges up and down the Mississippi have become an inexpensive method for shipping the crude. One of the three stocks Aaron mentions is Trinity Industries (TRN[5]). While it’s better known for making railcars, Trinity is also one of the biggest manufacturers of inland barges. Plus, it’s one of my favorite businesses[6] anywhere and is still reasonably cheap despite the market’s run up.

The best you’re going to be able to do here is to buy the First Trust Industrials/Producer Durables AlphaDEX Fund (FXR[7]), a modified equally weighted fund that also uses fundamental factors like price-to-sales and price-to-growth to select the 105 holdings. TRN is weighted at 1.13%, but something is better than nothing. Besides, there are all sorts of interesting companies in addition to Trinity. And while at 0.70% expenese, FXR is definitely not the cheapest ETF available … but given the additional screening that’s done to build the index it replicates, it’s understandable.

Google

Over at The Slant, editor Jeff Reeves suggested that Google (GOOG[8]) was ready to crash through the $1,000 mark[9] in 2013. More importantly, he believes that once it does it will keep going … to infinity and beyond! Okay, he didn’t really say that, but he does see it continuing its momentum for some time. Google has a lot of interesting projects that it’s working on at the moment that are likely to pay off down the road. Plus, with Google fairly valued compared to the Nasdaq-100, Jeff believes its strong fundamentals make it a reasonable buy.

Your ETF alternative in this instance is a no-brainer. The Technology SPDR (XLK[10]) is wonderfully cheap at an annual expense ratio of 0.18%. For that, you get 79 tech holdings including Google in the number three spot at just under 8%. The only downside to this fund is that it’s capitalization-weighted which results in Apple (AAPL[11]) being the top holding at 13%. Other than that, it’s an inexpensive way to play Google and the U.S. tech market.

Domino’s Pizza

Tom Taulli must have been hungry last week with all his talk about pizza. Still, with Domino’s Pizza (DPZ[12]) beating on the top and bottom lines in its latest quarterly report, Tom figured its potential growth outside the U.S.[13] more than outweighs a stock that’s trading at 27 times forward earnings. There’s no question that Domino’s has been successful in recent years and I agree with Tom that the pros definitely outweigh the cons.

Finding an ETF that has a significant position in Domino’s isn’t an easy task. However, the PowerShares DWA SmallCap Technical Leaders Portfolio (DWAS[14]) is a fund that’s worth considering despite Domino’s weighting of just 1.07%. Heck, that makes it the fourth largest pick! Less than a year old, this fund invests in 200 of the smallest U.S. publicly traded companies (out of a universe of 2,000) that exhibit strong relative strength characteristics. What I really like about the fund is that it’s well diversified with investments in 10 different sectors. If you believe in small-cap investments, as I do, this is a great way to capture Domino’s and other small guys at the same time.

Western Union

For my last recommendation, I’m going with Trader Reserve’s article discussing how an improving economy combined with immigration reform will be a boon for Western Union (WU[15]) and other companies that specialize in wiring money overseas[16]. With a large Hispanic workforce in the construction industry, the housing meltdown of 2007-2009 dramatically reduced the amount of money being wired home to Latin America. Now, though, with the rebound well underway, remittances to Latin America are expected to grow by almost 8% in 2013. These facts, along with Western Union’s strong brand, make it a wise investment indeed.

Your best bet for an ETF alternative is the Market Vectors Wide Moat ETF (MOAT[17]), which replicates the performance of the Morningstar Wide Moat Focus Index. The index is composed of 20 equally weighted stocks that are undervalued and provide a sustainable competitive advantage over their peers. Western Union is the third largest holding at 5.36%, while Berkshire Hathaway (BRK.A[18], BRK.B[19]) is also in the top 10. Slightly more than a year old, MOAT has underperformed the S&P 500 year-to-date. Long term, though, I think it will do just fine. Of course, don’t expect huge gains because it’s really just a blue-chip fund in disguise.

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

Endnotes:
  1. short squeeze trading opportunities: http://investorplace.com/2013/05/the-shorts-are-doubling-down-on-these-3-stocks-and-theyre-wrong/
  2. SYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYY
  3. RHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=RHS
  4. hydraulic tracking revolution: http://investorplace.com/2013/05/dont-miss-out-on-the-barge-bonanza/
  5. TRN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRN
  6. favorite businesses: http://investorplace.com/2012/09/3-conglomerates-not-named-berkshire-to-buy-now-trn-lvmuy-csl/
  7. FXR: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXR
  8. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  9. ready to crash through the $1,000 mark: http://slant.investorplace.com/2013/05/google-is-going-to-1000-and-then-some/
  10. XLK: http://studio-5.financialcontent.com/investplace/quote?Symbol=XLK
  11. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  12. DPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPZ
  13. potential growth outside the U.S.: http://investorplace.com/2013/05/should-i-buy-dominos-pizza-3-pros-3-cons/
  14. DWAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DWAS
  15. WU: http://studio-5.financialcontent.com/investplace/quote?Symbol=WU
  16. wiring money overseas: http://investorplace.com/2013/05/a-stock-to-profit-from-immigration-trends-wu-mgi/
  17. MOAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MOAT
  18. BRK.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.A
  19. BRK.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=BRK.B

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