Mine the Bakken Oil Surge: ETF Alternatives for Hot Stock Picks

by Will Ashworth | October 7, 2013 2:42 pm

Mine the Bakken Oil Surge: ETF Alternatives for Hot Stock Picks

The government shutdown was popular conversation this past week.

In the end, it didn’t seem to rile the markets much, as the S&P 500 was off just 0.1% for the five days of trading. With the stock picking getting increasingly difficult, InvestorPlace contributors went to work finding some solid recommendations. Here are my ETF alternatives.

Maximus

With the federal government was in the spotlight this past week, Hilary Kramer focused on Virginia-based Maximus (MMS[1]), a provider of processing services to government[2] health and human services agencies in the US, Canada and elsewhere. Administrative services for Medicaid and Medicare programs are one of its specialties. Its economies of scale allow it to more efficiently process paperwork than governments can — a big reason why its services are in high demand. This is one small-cap expected to benefit from Obamacare.

With a market cap of $3.2 billion, I wouldn’t consider Maximus a small-cap (I view mid-caps as $2 billion to $10 billion) but the S&P SmallCap 600 Capped Information Technology Index does, so I’m going with the PowerShares S&P SmallCap Information Technology Portfolio (PSCT[3]), which seeks to replicate the performance of the index. PSCT is a group of 125 holdings related to the information technology field, and Maximus is the second-largest weighting at 2.67%. In existence since April 2010, its performance since its inception is slightly lower than the entire S&P SmallCap 600, but much higher than the S&P 500. Especially attractive is its annual expense ratio which is just 0.29%. That’s very good for a small-cap fund.

Gun Stocks

On the first day of October, Jim Woods was talking about guns[4]. Specifically, he’s interested in Sturm, Ruger & Co (RGR[5]) and Smith & Wesson Holding (SWHC[6]), two gun manufacturers that have done very well in recent years. Woods believes that Americans will continue to hoard guns as long as the federal government seeks to restrict their use through tighter controls. As a result, both stocks have done very well the past three years with Ruger achieving a 75% annualized total return and Smith & Wesson and equally impressive 44%. With the political scenario regarding guns not expected to change, Jim sees more gains in the future.

A great way to play the entire defense industry is to buy iShares’ U.S. Aerospace & Defense ETF (ITA[7]), which is just as much about commercial airplanes as it is guns and fighter planes. ITA holds a total of 38 stocks, including the two gun manufacturers whose weightings are 1.32% (Ruger) and 0.91% (Smith & Wesson). The top 10 holdings represent 56.7% of the fund’s $187 million in total net assets, which fits nicely between too focused and too diversified. Its biggest holding at 9.55% is Boeing (BA[8]), a stock I wholeheartedly recommend[9] for long-term investors. The ITA is a good secondary fund to hold in addition to core investments like the SPDR S&P 500 (SPY[10]).

The Bakken

I don’t know about you but I just love saying the word “Bakken.” I might not be an oil expert like Aaron Levitt, but I can spot an opportunity a mile away. Last week, Aaron’s article “3 Stocks to Cash In on the Surging Bakken”[11] recommended Continental Resources (CLR[12]), Oasis Petroleum (OAS[13]), and Oneok Partners (OKS[14]). The first two are oil producers while the third is a pipeline company. All three look like good long-term picks given the strength of the Bakken (I said it again) production today and in the future. America’s energy independence is absolutely reliant on the Bakken’s production.

Trying to corral all three in one ETF is near impossible with the exception of a total market fund, so I’m not even going to try. Instead, I’m going to recommend that you look at the SPDR S&P Oil & Gas Exploration & Production ETF (XOP[15]), which seeks to replicate the performance of the oil and gas exploration and production industry. With almost $1 billion in total net assets, the modified equal-weight ETF has 71 holdings including OAS at a 1.69% weighting and CLR at 1.52%. In the last three months alone, the XOPs achieved a total return of 16.1% through October 4, almost 11 percentage points higher than the SPY. Long-term, the energy industry is always a good bet.

Turnarounds

Jeff Reeves believes turnarounds[16] are a good way to win in the markets. Buying today’s dogs early in their recoveries can be even more lucrative than riding momentum investments like Tesla (TSLA[17]), which is up 540% in the past year alone. Of the five turnaround players Jeff highlights, Netflix (NFLX[18]) or Best Buy (BBY[19]) would be my two choices. Netflix because its business model of original content mixed with new, not-so-new and old material seems to working; and Best Buy because its CEO Hubert Joly[20] is doing his darnedest to ensure it doesn’t become irrelevant.

The ETF to own that gets you both of these stocks and a lot of good consumer discretionary companies to boot is the First Trust Consumer Discretionary AlphaDEX Fund (FXD[21]), which is based on The StrataQuant Consumer Discretionary Index. The index itself ranks stocks from the Russell 1000 using both value and growth factors. Taking the top 134, it then divides then into quintiles equally weighting each of the stocks within each quintile. It then reconstitutes and rebalances quarterly. Currently, Netflix is the second-largest holding at 1.34% and Best Buy slightly lower at 1.29%. Although its expense ratio is higher than the average ETF at 0.70%, its ranking methodology warrants a higher investment management fee due to its complicated nature.

Beer

Although certain alcohol-related stocks have had good year on the markets — think Boston Beer (SAM[22]) and Constellation Brands (STZ[23]) — they’ve generally underperformed as a group when compared to the S&P 500. Beer stocks even more so than distilleries and wineries, which makes sense given that traditional beer companies[24] seem to be losing ground to almost anyone selling a premium product. Charles Sizemore feels Ambev (ABV[25]) is one beer company that’s actually expensive right now, preferring Anheuser-Busch (BUD[26]), its majority owner, or Heineken (HEINY[27]) if a beer stock is on your radar.

To capture both stocks with a decent weighting in each, one must look to Europe. The fund that interests me in this situation is the WisdomTree Europe Hedged Equity Fund (HEDJ[28]), which seeks to invest in some of the biggest European-based global companies while mitigating the risk of investing in Euro-denominated stocks. Take BUD for example. It generates 87% of its revenue outside Europe, yet because it’s based in Belgium, it’s positively or negatively affected by currency translation the same way that US companies who do a large amount of business outside America are affected by the US dollar’s appreciation or depreciation against the currencies where it does business. Hedging attempts to lower the risk of investing in European equities. BUD is the second-largest holding at 5.76% while Heineken’s weighting is 1.14%.

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

Endnotes:
  1. MMS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMS
  2. processing services to government: http://investorplace.com/2013/09/profit-from-obamacare/
  3. PSCT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PSCT
  4. talking about guns: http://investorplace.com/2013/10/gun-stocks-swhc-rgr/
  5. RGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=RGR
  6. SWHC: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWHC
  7. ITA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ITA
  8. BA: http://studio-5.financialcontent.com/investplace/quote?Symbol=BA
  9. recommend: http://investorplace.com/2013/01/should-i-buy-boeing-3-pros-3-cons-jan-17/
  10. SPY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SPY
  11. “3 Stocks to Cash In on the Surging Bakken”: http://investorplace.com/2013/10/bakken-shale-oneok-continental-resources-oasis-petroleum/view-all/
  12. CLR: http://studio-5.financialcontent.com/investplace/quote?Symbol=CLR
  13. OAS: http://studio-5.financialcontent.com/investplace/quote?Symbol=OAS
  14. OKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=OKS
  15. XOP: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOP
  16. turnarounds: http://investorplace.com/2013/10/5-top-turnaround-stocks/view-all/
  17. TSLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSLA
  18. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  19. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  20. CEO Hubert Joly: http://investorplace.com/2013/08/is-best-buy-back/view-all/
  21. FXD: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXD
  22. SAM: http://studio-5.financialcontent.com/investplace/quote?Symbol=SAM
  23. STZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=STZ
  24. beer companies: http://investorplace.com/2013/10/ambev-stock-abv-bud-heiny/
  25. ABV: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABV
  26. BUD: http://studio-5.financialcontent.com/investplace/quote?Symbol=BUD
  27. HEINY: http://studio-5.financialcontent.com/investplace/quote?Symbol=HEINY
  28. HEDJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=HEDJ

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