by Will Ashworth | July 29, 2013 1:37 pm
So far, S&P 500 company second-quarter earnings have been solid, but not spectacular. Last week, the index ended slightly in the black with a 0.03% loss as the possibility of slower economic growth once again reared its ugly head. If you ask me, the market could be in for a bit of correction.
With that in mind, my exchange-traded fund alternatives for last week’s stock recommendations are a conservative bunch:
In my experience, mid-caps tend to be the best-performing U.S. stocks. That makes the mid-cap growth portfolio Larry Meyers constructed last week appealing. Meyers used the iShares Russell Mid-Cap Growth ETF (IWP) as the core holding and added some of his own side bets to boost the performance, including. Since its inception in 2001, IWP has achieved an annualized return of 6.52%.
While I like Meyers’ game plan, ETF investing is about simplifying your portfolio. My solution would be to instead buy the iShares Core S&P Total U.S. Stock Market ETF (ITOT), which is a combination of the S&P 500, MidCap 400 and SmallCap 600, effectively giving you three funds in one.
In addition, its holdings include seven of Meyers’ side bets — like Dick’s Sporting Goods (DKS) and AutoNation (AN) — all for the bargain basement price of 0.07%.
Next up, Jeff Reeves mentioned last week that Facebook (FB) was at its highest point since its IPO in May 2012. Reeves noted that the stock price at the very least has stabilized. And if it manages to blow past $38 in the next few months, it could be off to the races.
The driver of the stock’s growth has been the impressive growth in mobile revenue. Still, a bunch of variables remain that could cause the stock to come crashing down to earth. A fund can protect you from such a drop, and there are several alternatives you could choose.
My favorite is the First Trust U.S. IPO Index Fund (FPX), which has Facebook as its top holding with a weighting of 9.35%. Although I probably sound like a broken record since I pick this ETF every time I want a little diversification, the simple truth is that its 100-stock portfolio provides investors with a great way to invest in some of America’s fastest growing companies. There’s a reason Morningstar gives it five stars.
While Facebook bounced off earnings, Caterpillar (CAT) wasn’t so lucky. And so Tom Taulli checked out the pros and cons of owning the manufacturer of construction and mining equipment, which is badly faltering on the top and bottom lines.
One of the world’s greatest shorts, Jim Chanos, believes Caterpillar is entering an extended period of sub-par earnings. Chanos, like every investor, isn’t always right. But he’s right enough to make investors worry. Taulli, on the other hand, believes — despite this negative sentiment — that the pros still outweigh the cons. He says it’s a buy.
For those not as sure, I recommend the Market Vectors Wide Moat ETF (MOAT), an equal-weighted fund that is a collection of 20 stocks Morningstar feels are attractively priced and possess a sustainable competitive advantage. Caterpillar’s current weighting is 4.63%, which reflects its downward trend over the past few months.
It’s not the cheapest fund with an expense ratio of 0.49%, but it provides a small, interesting group of holdings including Facebook and Berkshire Hathaway (BRK.B).
Tim Melvin believes the number of safe and cheap stocks available has diminished dramatically. In fact, his latest screen generated just four possibilities. Two such stocks: Pericom Semiconductors (PSEM), which makes integrated circuits for mobile phones and other electronic devices, and Kimball International (KBALB), which provides contract manufacturing for several industries including its legacy in furniture.
What do both have in common? They trade for 90% of their tangible book value. That’s cheap.
Warren Buffett once bought deep-value investments. He called them “cigar butts” because no one else wanted them. To make money on this type of stock you have to have a lot of patience — something most investors sadly are missing. Therefore, I’d hesitate before buying either stock.
However, if you buy the iShares Russell 2000 ETF (IWM), you get both stocks and the rest of the Russell 2000, which represents the smallest 2,000 (more or less) stocks of the Russell 3000 index. It’s a good way to play small caps.
There’s a lot of positive talk these days when it comes to the automakers. Ed Elfenbein wrote glowingly about Ford (F) last week, suggesting it will keep delivering above-average earnings in the next few quarters as China continues to expand and Europe stems its losses.
Of course, the Big Three all seem to be doing well as America slowly pulls itself out of a five-year funk. Therefore, I’d be hard pressed to pick a winner between Ford and General Motors (GM). Thankfully, I don’t have to. Instead, just try the Consumer Discretionary SPDR (XLY). It has Ford at a weighting of 3.63% and GM at 1.53%, plus is a cheaper and more sensible alternative to a more niche fund.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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