Dip Into Deere: ETF Alternatives for Hot Stock Picks

by Will Ashworth | August 19, 2013 1:33 pm

Dip Into Deere: ETF Alternatives for Hot Stock Picks

The major indices are coming off their second consecutive week in the red, and in the past five trading days alone, the S&P 500 shed 2.1% as investors fretted about higher bond yields. Could 2013′s gains be coming to an end? Perhaps. But perhaps that’s all the more reason you should consider bundling some recent stock picks into exchange-traded funds and reap the rewards of diversity:

Deere & Co.

Dan Burrows sees some difficult times ahead[1] for Deere & Co. (DE[2]) given prices for agricultural commodities are imploding. When farmers make less, they spend less, resulting in fewer combine orders. Deere stock has been moribund so far in 2013, up just 2% year-to-date. Long-term, Big Green will do just fine, but with no catalysts in sight, you’ll likely have to put up with some iffy quarters in the meantime.

When picking ETF alternatives, I like to go with broader funds where possible. Here, I’m less inclined to go after ag, and instead suggest the Guggenheim S&P 500 Equal Weight Industrials ETF (RGI[3]), which is the 61 industrial stocks from the S&P 500, equally weighted. DE is weighted at 1.56%, and RGI charges 0.5% in expenses, or $50 for every $10,000 invested.

Royal Dutch Shell

On Aug. 15, Tom Taulli explored the pros and cons[4] of investing in Royal Dutch Shell (RDS.B[5]), and he concluded that improving economies in both the U.S. and Europe will lead to higher oil prices, substantially increasing RDS’s operating cash flow. Right now, it’s barely covering its capital expenditures and dividend. Based on $100 oil, Shell expects to generate $200 billion in cash flow from operations in the three years from 2012 and 2015 — $64 billion greater than the three years prior to 2012.

A good way to benefit from RDS and some of its ADR brethren is to invest in the PowerShares BLDRS Developed Markets 100 ADR Index Fund (ADRD[6]). With exactly 100 holdings, RDS (Class A and Class B) weighs in at 4.9%. Combining both classes of stock, RDS is the largest of the fund’s holdings. Although Euro-centric in composition, it’s actually a very good proxy for a global, large-cap fund. With a 30-day SEC yield of 2.8% and an annual expense ratio of 0.3%, it’s attractive to both dividend investors and those focused on lower fees.

Kraft Foods

InvestorPlace Assistant Editor Adam Benjamin likes Kraft Foods (KRFT[7]), and recently laid out the reasons why its recent decline in share price makes it a “buy” rather than a “sell.”[8] Despite Warren Buffett dumping KRFT, Adam sees a company with great cash flow, fantastic brands and a solid dividend. It’s hard to argue with his logic. Personally, I prefer[9] General Mills (GIS[10]) to Kraft, but they’re both good companies. Purchasing an ETF allows you to own both.

The PowerShares Dynamic Food & Beverage Portfolio (PBJ[11]) is composed of 30 U.S. food and beverage companies, and is benchmarked to an index that uses a combination of investment criteria to select the ultimate holdings. General Mills is weighted at 4.95%, 44 basis points higher than Kraft. Its former stablemate — Mondelez International (MDLZ[12]) — has a weighting of 4.96%, the third-largest in the portfolio. PBJ has generated annualized total returns of 8.8% since June 2005, or 290 basis points higher than the S&P 500. That’s important because its annual expense ratio of 0.63% is slightly higher than I generally like to recommend.

Illumina

San Diego-based Illumina (ILMN[13]) develops technology that assists scientists in their study of molecular medicine. InvestorPlace chief technical analyst Sam Collins has a price target of $85[14], about 10% above where it’s currently trading. Long-term, he sees even more profits available for those willing to hold for an extended period. If you’re like me and aren’t completely in tune with biotechs, an ETF alternative seems like an excellent choice.

Some biotech ETFs have pretty high expenses, but at 0.35%, the Market Vectors Biotech ETF (BBH[15]) isn’t one of them at 0.35%. The fund invests in 25 of the largest U.S.-listed biotech companies, and ILMN is the eighth-largest holding at 4.63%. The top 10 holdings account for 65% of BBH’s assets, providing investors with a very focused investment. While I mentioned above that I like to spread out my bets, in this case the idiom “in for a penny, in for a pound” comes to mind. If you’re going to play the biotech game, you might as well play for keeps.

Radio Stocks

Dan Burrows tackled radio stocks on Aug. 16[16], and out of three possibilities — Pandora¬†(P[17]), Sirius XM (SIRI[18]) and Cumulus Media (CMLS[19]) — he only thinks the home to Howard Stern is worth buying. His rationale: Pandora is overcooked and Cumulus isn’t growing enough, but Sirius XM is a relative bargain based on its 30% discount to its own five-year average P/E.

However, if you’re game on all three stocks, buy the Global X Top Guru Holdings Index ETF (GURU[20]), which owns both Pandora and Cumulus as well as Liberty Media (LMCA[21]), which owns 52% of Sirius XM’s stock. The equal-weighted fund combs 13F SEC filings looking for conviction investment ideas of prominent hedge fund managers. All three are top 20 holdings with weightings of no less than 2.06%. It isn’t cheap at 0.75%, but if you think hedge funds know what they’re doing, this is a good way of capturing pure-play radio stocks.

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

Endnotes:
  1. difficult times ahead: http://investorplace.com/2013/08/deere-stock-earnings/
  2. DE: http://studio-5.financialcontent.com/investplace/quote?Symbol=DE
  3. RGI: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGI
  4. pros and cons: http://investorplace.com/2013/08/should-i-buy-shares-of-royal-dutch-shell-3-pros-3-cons/
  5. RDS.B: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.B
  6. ADRD: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADRD
  7. KRFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KRFT
  8. “buy” rather than a “sell.”: http://investorplace.com/2013/08/is-kraft-a-good-retirement-pick/
  9. prefer: http://investorplace.com/2013/08/consumer-staples-one-buy-one-sell-gis-mjn/
  10. GIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GIS
  11. PBJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBJ
  12. MDLZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDLZ
  13. ILMN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ILMN
  14. price target of $85: http://investorplace.com/2013/08/trade-of-the-day-illumina-ilmn-2/
  15. BBH: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBH
  16. tackled radio stocks on Aug. 16: http://investorplace.com/2013/08/sirius-siri-pandora-cumulus-cmls-radio-stock/view-all/
  17. P: http://studio-5.financialcontent.com/investplace/quote?Symbol=P
  18. SIRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIRI
  19. CMLS: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMLS
  20. GURU: http://studio-5.financialcontent.com/investplace/quote?Symbol=GURU
  21. LMCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMCA

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