A New Kind of Value Meal: ETF Alternatives for Hot Stock Picks

by Will Ashworth | September 23, 2013 2:23 pm

A New Kind of Value Meal: ETF Alternatives for Hot Stock Picks

Although last week was a volatile one, the S&P 500 still managed to gain 1.3% over five days of trading and it’s shaping up to be one of the best Septembers ever.

The index finished last week up more than 20% year-to-date and, with just one quarter to go, InvestorPlace contributors continued tossing out stock recommendations to close out the year. These ETF alternatives might be a safer way of going about those picks:

Capital Markets

This first exchange-traded fund actually bundles two stock recommendations from two different articles. First, Johnson Research Group recommended three heavily shorted stocks[1] worth buying, one of which was Legg Mason (LM[2]), an investment manager providing mutual funds, closed-end funds and institutional money management. Despite the company’s restructuring, the stock has gained over 30% year-to-date.

On top of that, Dan Burrows thinks TD Ameritrade (AMTD[3]) is the best option among the big retail brokers. While the group has had a big run in 2013, TD Ameritrade is the only firm growing assets[4] with any kind of regularity — the key to success in the brokerage business.

Both stocks are holdings of the SPDR S&P Capital Markets ETF (KCE[5]), a modified equal weight portfolio of 45 stocks. Legg Mason and TD Ameritrade have weightings of 2.86% and 2.7%, respectively. Its annual expense ratio is 0.35%, with 0.91% in acquired fund fees and expenses. These fees are not incurred by the fund itself, but are expenses incurred through investment in various business development companies.

Casual Dining

Louis Navellier recommended three casual dining stocks[6] — Sonic (SONC[7]), Wendy’s (WEN[8]) and Domino’s (DPZ[9]) — last week, as he feels Americans are looking for faster, cheaper dining options. Plus, all three are kicking their earnings growth into high gear. That should mean continued appreciation the stocks, which are already up an average of 71% year-to-date.

The ETF alternative is a no-brainer. The PowerShares Dynamic Leisure and Entertainment Portfolio (PEJ[10]) is a 30-stock portfolio of companies that provide leisure and entertainment for the American public. The top holding is Liberty Media (LMCA[11]) — whose big investment is SiriusXM (SIRI[12]) — but Sonic also weighs in at 2.96%, followed by Wendy’s at 2.86% and Domino’s at 2.80%.

Over the past five years, PEJ has achieved an annualized total return of more than 18%, is rated four stars by Morningstar, and has a reasonable net expense ratio of 0.63% that’s well worth it.

HollyFrontier

Gas prices have averaged more than $3 per gallon for over 1,000 consecutive days[13]. According to energy expert Aaron Levitt, one of the major beneficiaries is HollyFrontier (HFC[14]), as the company’s Midwest refineries keep costs low and profits per barrel high. With a dividend yield of 2.9%, Levitt sees this refiner as a very smart play.

The natural tendency in this situation is to go with an energy-related ETF. However, Aaron was specific in his praise of HollyFrontier and not refiners in general. Therefore, I’m going to recommend the Vanguard S&P Mid-Cap 400 Growth Index ETF (IVOG[15]), which is a collection of 227 mid-cap growth stocks from the S&P Mid-Cap 400.

HollyFrontier is the fifth-largest holding with a 1.3% weighting. Other stocks I like in its top 25 holdings include Tractor Supply (TSCO[16]) and Polaris Industries (PII[17]). Historically, mid-cap stocks outperform[18] both small- and large-cap stocks. Best of all, Vanguard’s expense ratio of 0.20% is wonderfully cheap.

Top-Dollar

Next up, assistant editor Alyssa Oursler recommended four stocks trading well above $100[19] last week, pointing out that investors shouldn’t get caught up in the stock price itself, but should worry about the valuation. Just because Amazon (AMZN[20]) is trading for over $300 doesn’t mean it isn’t worth owning. The same holds for Chipotle Mexican Grill (CMG[21]), MasterCard (MA[22]) and Google (GOOG[23]). They’re all good companies trading at fair prices.

To own all four of these stocks, your best bet is an ETF related to the S&P 500. In my opinion, the iShares Core S&P 500 ETF (IVV[24]) gives you the best possible weightings for all four of them — including Google in the top 10 at 1.59% — and is strong core fund for any investment portfolio.

Best of all, your annual expense ratio is 0.07%, meaning you’ll barely notice you’re being charged a fee.

Mechel Steel

My last ETF alternative comes via a stock recommendation by Anthony Mirhaydari, who recently pointed out five stocks[25] that should benefit from the Fed’s decision not to taper. With such a diverse group, you’re not going to find a fund that holds all five in any significant manner … but I see the steel industry having the best potential appreciation of all the industries mentioned. Therefore, I’ll go with an ETF that holds Russian steel company Mechel Steel (MTL[26]).

That ETF is Market Vectors Steel ETF (SLX[27]), which has Mechel Steel at a weighting of 1.42%. A total of 26 steel companies are held in the portfolio, with Vale (VALE[28]) and Rio Tinto (RIO[29]) accounting for almost a quarter of it.

A few things to note: The annual expense ratio of 0.55% is above average, although not outlandishly so. SLX also isn’t well-loved by Morningstar, with a one-star rating. The bottom line: It’s definitely a contrarian play. Given the inherent risk of steel stocks, SLX should at most represent 5% of your investment portfolio.

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

Endnotes:
  1. three heavily shorted stocks: http://investorplace.com/2013/09/short-interest-stocks-to-buy-fast-trip-lm/
  2. LM: http://studio-5.financialcontent.com/investplace/quote?Symbol=LM
  3. AMTD: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMTD
  4. growing assets: http://investorplace.com/2013/09/retail-discount-broker-schwab-etrade-ameritrade/view-all/
  5. KCE: http://studio-5.financialcontent.com/investplace/quote?Symbol=KCE
  6. three casual dining stocks: http://investorplace.com/2013/09/3-dining-stocks-actually-worth-buying/
  7. SONC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SONC
  8. WEN: http://studio-5.financialcontent.com/investplace/quote?Symbol=WEN
  9. DPZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=DPZ
  10. PEJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEJ
  11. LMCA: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMCA
  12. SIRI: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIRI
  13. 1,000 consecutive days: http://investorplace.com/2013/09/hollyfrontier-eats-up-perpetual-3-plus-gas/
  14. HFC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HFC
  15. IVOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVOG
  16. TSCO: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSCO
  17. PII: http://studio-5.financialcontent.com/investplace/quote?Symbol=PII
  18. mid-cap stocks outperform: http://www.jhinvestments.com/CMS/DownloadableItems/ResearchAndCommentary/Public/p_MCSWP.pdf
  19. four stocks trading well above $100: http://investorplace.com/2013/09/4-expensive-stocks-worth-every-penny/view-all/
  20. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  21. CMG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMG
  22. MA: http://studio-5.financialcontent.com/investplace/quote?Symbol=MA
  23. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  24. IVV: http://studio-5.financialcontent.com/investplace/quote?Symbol=IVV
  25. five stocks: http://investorplace.com/2013/09/5-no-taper-breakout-stocks-to-buy/view-all/
  26. MTL: http://studio-5.financialcontent.com/investplace/quote?Symbol=MTL
  27. SLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLX
  28. VALE: http://studio-5.financialcontent.com/investplace/quote?Symbol=VALE
  29. RIO: http://studio-5.financialcontent.com/investplace/quote?Symbol=RIO

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