by Will Ashworth | October 28, 2013 2:56 pm
The S&P 500 was up 0.9% this past week, its third consecutive weekly gain. The index is hitting new all-time highs while consumer confidence goes the other way. With interest rates looking like they’re going to stay low for some time, equities remain the play to be. Here are my ETF alternatives to some of our contributors’ stock recommendations from last week.
The Kinder Morgan (KMI) empire has taken it on the chin in recent months due to a special report from Hedgeye Risk Management that asserted Kinder Morgan was a “house of cards” ready for a nasty spill. Aaron Levitt points out that rising cash flows across its various entities should be enough to push it back above $40. Levitt sees nothing but good times ahead, suggesting now is the time to buy its stock.
A great way to get in on the action while also getting excellent diversification is to buy First Trust’s US IPO Index Fund (FPX), which has KMI in the top 10 holdings with a weighting of 4.44%. There are exactly 100 companies in the fund with an emphasis on mid- and large-cap stocks. In existence since April 2006, the fund gets five stars from Morningstar for its performance over the past five years compared to 1302 funds in the large growth category. As ETFs go, this is one of my favorites because 25% of its $231 million in total net assets are invested in consumer discretionary stocks, which generally tend to be market leaders when the indices are rising.
Jeff Reeves was all over the electric vehicle revolution last week providing readers with three ways to play the trend other than Tesla (TSLA), which is up an eye-popping 400% year-to-date and 517% for the past 52 weeks through October 25. I’m a big fan of Tesla. Long-term I think it will grow into its currently insane valuation, but that might take 12-18 months. Of Jeff’s recommendations, Johnson Controls (JCI) is probably the most mainstream bet that will do well regardless of the electric vehicle market.
If you’re like me and admire Tesla, but you’re worried about its excessive valuation, I’d recommend you take a look at the FPX from above. It has Tesla in the top 10 at a weighting of 2.42% — enough to have a meaningful position but not enough to get burned by a serious reversion to the mean. On the other hand, if you want to go with Johnson Controls, my suggestion is the PowerShares Cleantech Portfolio (PZD), which invests in 60 companies benefiting from clean energy movement. PZD is a modified equal-weighted fund in existence since October 2006. With a weighting of 2.99%, JCI is one of just three consumer discretionary stocks included in the portfolio. Its performance until recently has been extremely underwhelming, but it has since broken out to beat the market. Hopefully, it can carry its strong performance in 2013 (up 32% YTD through October 25) into next year.
PepsiCo’s (PEP) stock is up 24% year-to-date, almost double its soft drink peers. That has Tom Taulli wondering about the pros and cons of owning its stock. Activist investor Nelson Peltz likes Pepsi so much, he’s bought almost 13 million shares. However, he’d like it even more if the snack giant were to split its snacks business from its beverage business. The real growth is at Frito Lay; Peltz wants Pepsi CEO Indra Nooyi to split the company and then buy Mondelez International (MDLZ) to create a snacks behemoth. While it’s an interesting proposition, Pepsi’s stock has flatlined since Peltz went public with the idea in July. Nonetheless, Tom says it’s a buy.
In this type of situation I’d normally suggest buying the consumer staples fund with the lowest expense ratio. However, since we don’t know if any of the theatrics involving Peltz and Pepsi are going to play out, an equal-weight fund makes a whole lot of sense. Guggenheim’s S&P 500 Equal Weight Consumer Staples ETF (RHS) has Pepsi, Mondelez, Coca-Cola (KO), Dr Pepper Snapple (DPS) and Monster Beverage (MNST) at weightings of 2.46%, 2.52%, 2.46% and 2.51%, respectively. All the players in this little dance are included, and it only costs you 0.50% annually. Whatever happens, you’ll be covered.
Coach’s (COH) stock traded below $50 between July 2007 and October 2010. In the 36 months since, it has mostly traded above $50, making it difficult to know where the stock is heading next. Year-to-date, it’s down 10% compared to a gain of 25.5% for the S&P 500. The inspirational luxury brand has trailed the index for the past two years and has underperformed over a three-year period. The evidence is mounting that its best days are behind it. However, Charles Sizemore reckons that despite its North American problems, its stock is a great buy for the long term. Its brand is too strong in emerging markets to be permanently abandoned by investors. Sizemore says take the 2.7% dividend and wait for things to get better.
I might be going back to this well a little too often, but I’m recommending the Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (RCD), which holds the 83 consumer discretionary stocks in the S&P 500. Because COH performed poorly the last three months its current weighting of 1.06% is lower than all but three stocks: Cablevision (CVC), Gap (GPS) and JCPenney (JCP). Each quarter, the holdings are rebalanced back to a weighting of 1.20%. Currently, slightly more than half are above the quarterly reset. Year-to-date, RCD is beating the index itself by almost 10 percentage points, and I don’t see that changing any time soon. So, even if Coach doesn’t perform right away, the ETF should.
Caterpillar has (CAT) missed analysts’ average earnings estimates for three consecutive quarters, and its stock is down 3.5% year-to-date. Despite the obvious signs of distress, Dan Burrows believes the heavy machinery manufacturer will rebound once commodities do. Its long-term outlook is bright; the company just needs to get through the next 12-18 months. Global growth is just around the quarter.
For my last alternative, I’m going old school. The SPDR Dow Jones Industrial Average ETF (DIA) contains 30 of the biggest and oldest companies in America. While Caterpillar’s 3.49% weighting is in the middle of the pack, it’s enough to make a difference should good things start happening. Since its inception in 1998, DIA achieved an annual return of 6.61% through the end of September. Most importantly, it’s very cheap with an annual expense ratio of just 0.17%.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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