A Sip of SodaStream: ETF Alternatives For Hot Stock Picks

by Will Ashworth | September 16, 2013 2:27 pm

Don’t look now, but the S&P 500 is up 20.2% year-to-date through September 13, and gained another 200 basis points last week.

If the year were to end today, the S&P would be sitting on its best yearly performance since 2009 and its second-best in the past decade. With three-and-a-half months left in 2013, it’s very possible the index could challenge its 2009 return of 26.5%.

With that in mind, InvestorPlace contributors were busy coming up with interesting stock recommendations. Here are my ETF alternatives.

SodaStream

Dividend stocks have become extremely popular with income investors now that bonds have gone down the toilet. James Brumley recommended three dividend stocks to buy[1] September 9 that are prone to big dips after negative earnings results: SodaStream (SODA[2]), Google (GOOG[3]) and Qualcomm (QCOM[4]). While SodaStream is clearly not in the same league as the two larger tech giants, its stock tends to bounce back nicely after earnings-related selloffs. Unfortunately, it’s also the most difficult of the three stocks when it comes to finding an ETF alternative.

Your only bet is to go with the Market Vectors Israel ETF (ISRA[5]), a collection of 89 stocks either trading in Israel or linked to the country itself in some way. The top two holdings — Teva Pharmaceuticals (TEVA[6]) and Perrigo Company (PRGO[7]) — represent 20% of the $21.3 million in total assets, leaving very little for the remaining 87 stocks. SodaStream checks in at a weighting of 1.05%, putting it squarely in the top 25. There are plenty of companies you’ve probably never heard of before so it’s understandable if that scares you off. In addition, it’s a new fund that has only been in existence since June. However, the Tel Aviv 100 has outperformed the S&P 500 during the last 25 years, proving that Israel’s capital markets have come of age.

Energy Stocks

Louis Navellier delved into energy stocks[8] September 10, reminding investors that betting on these stocks simply because oil prices are currently facing upward pressure is a mistake. As with anything else, the fundamentals are what matter. Two stocks meeting his strict investment criteria are Cabot Oil & Gas (COG[9]) and EQT Corp. (EQT[10]). While the former is strictly an exploration and production company, the latter focuses on upstream, midstream and downstream. Some energy investors like to focus on E&P companies rather than diversifying into transportation, refining and the distribution of oil and natural gas. Fortunately, there’s an ETF that allows you to do both.

The First Trust ISE-Revere Natural Gas Index Fund (FCG[11]) is an equal-weight fund with 25 holdings that include COG and EQT at weightings of 3.94% and 4.04% respectively. The fund is rebalanced quarterly, and eligible investments must derive a substantial portion of their revenues from the exploration and production of natural gas. You’ll notice that despite the fund being equal-weight, the top holding — Goodrich Petroleum (GDP[12]) — has a weighting of 8.33%, which is far in excess of the 4% when rebalanced each quarter. The reason? The company’s stock is up 125% in the last three months. Come the next rebalance, assuming it still meets the fund’s ranking criteria, it will be reset to 4%.

Sears

Sears Holdings (SHLD[13]) gained 28% last week and is up 46% year-to-date through September 13. On a 10-year annualized basis it has actually outperformed the S&P 500 by 211 basis points. Could this be the dawning of a new era at Sears? No, says Tom Taulli. It’s just a short squeeze. Looking at the pros and cons[14] of owning its stock; Tom comes to the conclusion that the outlook for the department store continues to be bleak. Despite the stock being on a tear for the past few months, investors should stay away. I agree with him wholeheartedly.

Normally I don’t provide ETF alternatives for stocks that have been given the thumbs down by InvestorPlace contributors. However, there’s probably a contrarian contingent out there that will play Sears just because it’s one of the most loathed stocks anywhere. The easy call if that’s your thing is the SPDR S&P Retail ETF (XRT[15]), an equal-weighted fund with 99 retail stocks including SHLD at a weighting of 1.30%. In existence since June 2006, its performance puts the S&P 500 to shame. Retail will go through rough patches like any industry but the upside historically is better than most.

Philip Morris International

Yield hunters might want to take a look at Philip Morris International (PM[16]) — so says IP Assistant Editor Marc Bastow. Currently yielding 4.3%[17], the stock has seriously underperformed the past year, up a mere 5% in 2013. Much of the headwind has to do with Australia’s introduction of plainly packaged cigarettes that show no branding except the name along with large graphic warnings. Many other countries are watching closely and could also introduce the same bland packaging. While early days, cigarette makers see little change in Australian sales, but surveys do show more people are considering quitting as a result.

I find it hard to imagine that dyed-in-the-wool smokers are going to quit because the packaging is bland. If true, branding experts should be jumping for joy because their jobs are virtually guaranteed as a result. No, it’s the graphics that put people on a collision course with quitting. Nobody wants teeth like those depicted on cigarette packages[18]. That said, there will always be places where smoking is tolerated, and that’s where Philip Morris will do business. Do yourself a favor and buy the Vanguard Consumer Staples ETF (VDC[19]), which has both PM and Altria Group (MO[20]) in its top 10 holdings. Admittedly, its 12-month yield of 2.54% isn’t nearly as attractive as Philip Morris’ yield, but it does provide the appropriate downside protection.

Dividend Stocks

Dan Burrows recommended three relatively unknown stocks[21] September 12. Of the trio, I personally would be most interested in Hercules Technology Growth Capital (HTGC[22]), a business development company that provides secured debt and equity for start-up tech companies. While the risk is higher, the 7% yield (as of September 13) makes it easier to assume. It also doesn’t hurt that its stock is up 34% year-to-date and has achieved a five-year annualized total return of 14.8%.

The ETF here is the Market Vectors BDC Income ETF (BIZD[23]), which holds 26 business development companies including HTGC (a top 10 holding) at a weighting of 4.79%. The fund itself has a 30-day SEC yield of 7.4%. Unfortunately, it is less than a year old and has no performance record to speak of. Also, it’s important to keep in mind that it has acquired fund fees of 7.93%, which aren’t paid by investors, but can affect the performance of the ETF. Excluding fee waivers and acquired fund fees, its annual expense ratio is a reasonable 0.40%. I’m a big believer in the BDC business model, but it’s definitely not everyone’s cup of tea.

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

Endnotes:
  1. three dividend stocks to buy: http://investorplace.com/2013/09/buy-these-three-stocks-on-any-earnings-dip/view-all/
  2. SODA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SODA
  3. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  4. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  5. ISRA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ISRA
  6. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA
  7. PRGO: http://studio-5.financialcontent.com/investplace/quote?Symbol=PRGO
  8. energy stocks: http://investorplace.com/2013/09/2-fundamentally-sound-energy-stocks-to-buy/
  9. COG: http://studio-5.financialcontent.com/investplace/quote?Symbol=COG
  10. EQT: http://studio-5.financialcontent.com/investplace/quote?Symbol=EQT
  11. FCG: http://studio-5.financialcontent.com/investplace/quote?Symbol=FCG
  12. GDP: http://studio-5.financialcontent.com/investplace/quote?Symbol=GDP
  13. SHLD: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHLD
  14. pros and cons: http://investorplace.com/2013/09/should-i-buy-shares-in-sears-3-pros-3-cons/
  15. XRT: http://studio-5.financialcontent.com/investplace/quote?Symbol=XRT
  16. PM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PM
  17. yielding 4.3%: http://investorplace.com/2013/09/philip-morris-delivers-dividend-increase-pm-lo-mo-rai/
  18. cigarette packages: http://resources0.news.com.au/images/2011/04/07/1226035/166824-new-cigarette-packets.jpg
  19. VDC: http://studio-5.financialcontent.com/investplace/quote?Symbol=VDC
  20. MO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MO
  21. three relatively unknown stocks: http://investorplace.com/2013/09/high-yield-dividend-stocks-insider-buying/view-all/
  22. HTGC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HTGC
  23. BIZD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIZD

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