Don’t Get Burned by Solar: ETF Alternatives for Hot Stock Picks

by Will Ashworth | June 3, 2013 2:17 pm

Despite the S&P 500‘s shortened and losing week, the index closed out the month with a 2.1% increase — its first positive performance in May since 2009.

That bring its year-to-date gains over 14% and consumer confidence is stronger than it’s been since February 2008, which tells me stocks should keep rising. But whether I’m right or wrong, InvestorPlace contributors are going to keep providing stock recommendations.

With that in mind, here are my ETF alternatives for their latest picks.

Lorillard

Short interest on S&P 500 companies continues to dwindle. In fact, according to the Johnson Research Group, the short interest on S&P 500 companies[1] in the first two weeks of May dropped by 1%. Still, there are some companies seeing increased short interest, which provides investors with some short squeeze candidates. While Johnson Research named 10 candidates, I see Lorillard (LO[2]) as the most compelling of the bunch. It has a short interest of 16% — higher than any of the others on the list. With a dividend yield currently above 5%, it makes a very attractive investment for income investors who don’t mind a little capital appreciation at the same time.

For this ETF alternative, I’m going with a straightforward suggestion: the iShares Select Dividend ETF (DVY[3]). This is an ETF that focuses on 100 stocks that have consistently exhibited high dividend yields over a five-year period. Lorillard is the top holding with a weighting of 3.6%. While its 30-day SEC yield is lower than LO’s, it’s still a good return for investors interested in income. The management expense ratio is 0.40%, though, which is slightly more than the average equity ETF. Still, by purchasing DVY, you get exposure to Lorillard while also benefiting from other consumer goods companies.

Williams-Sonoma

Tom Taulli pondered the three pros and three cons[4] of buying Williams-Sonoma (WSM[5]) last week, too. His biggest concerns about the company are its premium valuation and that its high-end products leave it vulnerable to any economic uncertainty that crops up. Personally, I’ve followed WSM for several years and its ability to generate e-commerce revenue (three times as profitable as physical stores) makes it one of the best retail stocks to own anywhere. Sure it had a tough period in 2008 when its stock dropped 68% … but who didn’t?

For a fund to play WSM, I’m going to go with the Guggenheim Insider Sentiment ETF (NFO[6]), which invests on an equal-weighted basis in 100 securities (out of a list of 6,000) that exhibit strong insider sentiment combined with increasing earnings. Re-balanced and re-selected every quarter, its holdings are subject to greater change than the average passive index. As of May 31, WSM’s weighting was 1.1%, while the fund’s expense ratio is 0.60%.

Solar

Goldman Sachs (GS[7]) is bullish on solar stocks[8]. And while Jim Woods suggests that Goldman is very late to the party, he still sees some room to gallop. SunPower (SPWR[9]) alone has gained 300% in the past six months. Countries like China and Japan are gonzo for solar and even the U.S. is seeing strong demand for the energy source. Of course, late calls by analysts are as old as the industry itself. The question is how you protect yourself in case the analyst is wrong, while still gaining some potential upside. A perfect solution in this situation is an ETF because the diversification beyond solar, should it flat-line, will keep your portfolio moving higher.

That’s why I’m not going with the Guggenheim Solar ETF (TAN[10]), which Woods mentions at the beginning of his article, or even the Market Vectors Solar Energy ETF (KWT[11]). No, I prefer the PowerShares Global Clean Energy Portfolio (PBD[12]), which has a large solar component but also invests in solid industrial companies like AO Smith (AOS[13]) and Acuity Brands (AYI[14]) and even Tesla (TSLA[15]), which I view as one of America’s greatest companies. The only downside: a high expense ratio of 0.75%. But if you’re really sold on solar, it’s worth it.

Banks

Jeff Reeves over at The Slant was busy touting the financial stability of the banks[16] on May 30. Reeves pointed out that Moody’s has removed the “negative outlook” tag from the U.S. banking system for the first time since 2008. He then goes on to point out that eight big banks are up between 15% and 32% year-to-date. The financial sector is obviously getting stronger. More gains appear likely whether we’re talking about small, medium or large financial institutions. While JPMorgan (JPM[17]) is an easy proxy for the banking industry, I’d be more inclined to spread the wealth a little.

Therefore, the best ETF alternative is the First Trust Financials AlphaDEX Fund (FXO[18]), a modified equal-dollar weighted fund that invests in 164 stocks ranked on both growth and value factors. I like the fund because its top 10 holdings account for just 11.5% of the overall portfolio. Of course, it’s not a bank pure-play. In fact, commercial banks account for just 18.4% of the portfolio with insurance the big winner at 38.5%. However, because it’s equal-weighted, the insurance weighting is less of a concern. On the downside, its 0.70% expense ratio is high but given the portfolio construction of the fund, it’s not unusual.

General Electric

Closing out the week, Marc Bastow was opining about General Electric’s (GE[19]) transformation into an industrial company. I know what you’re thinking — wasn’t it always an industrial company? Technically, yes. However, its detour into the wild world of financial services saw it outsourcing much of its manufacturing. With new plants opening in Kentucky and elsewhere in the U.S., GE is getting back into making things once again[20]. Bastow thinks this a good thing and has bought shares as a result. I agree with him wholeheartedly. GE’s future is its manufacturing know-how and not financial sleight of hand.

While I think Jeff Immelt’s done a reasonably good job as CEO, it’s not a slam dunk that GE’s transformation will ultimately be successful. Therefore, I’d suggest an ETF that has a significant stake in GE, but not into the double digits. The ETF I have in mind is the iShares Global Industrials ETF (EXI[21]), which has GE as its largest holding with a weighting of 8.22%. Investing in a total of 190 holdings located in the U.S. and elsewhere, the fund replicates the performance of the S&P Global 1200 Industrials Sector Index. At an expense ratio of 0.48%, it gives investors global exposure to industrial stocks, which should benefit from improving economies in the U.S., Japan and eventually Europe.

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

Endnotes:
  1. short interest on S&P 500 companies: http://investorplace.com/2013/05/3-stocks-thatll-make-the-shorts-suffer/
  2. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO
  3. DVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVY
  4. three pros and three cons: http://investorplace.com/2013/05/should-i-buy-williams-sonoma-3-pros-3-cons/
  5. WSM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WSM
  6. NFO: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFO
  7. GS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GS
  8. bullish on solar stocks: http://investorplace.com/2013/05/plenty-of-sunshine-left-on-solar-stocks/
  9. SPWR: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPWR
  10. TAN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TAN
  11. KWT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KWT
  12. PBD: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBD
  13. AOS: http://studio-5.financialcontent.com/investplace/quote?Symbol=AOS
  14. AYI: http://studio-5.financialcontent.com/investplace/quote?Symbol=AYI
  15. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  16. financial stability of the banks: http://slant.investorplace.com/2013/05/bank-stocks-are-back/
  17. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  18. FXO: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXO
  19. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  20. making things once again: http://investorplace.com/2013/05/after-a-few-missteps-ge-is-back-on-track/
  21. EXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXI

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