ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | July 9, 2012 11:52 am

It’s probably a good thing that last week was shortened due to the Fourth of July holiday. But by the time the June jobs report came out on Friday[1] (a stinker), the markets were in no mood for a party. With a number of black clouds looming,  including a potential global slowdown, the markets were mixed in July 2-6 trading. With no sense of direction at the moment, I’ll provide investors with some ETF alternatives to InvestorPlace stock recommendations in last week’s articles.

Starting off the week and month, Susan J. Aluise was enthusiastic about three restaurant stocks[2], specifically those in the fast-casual segment: McDonald’s (NYSE:MCD[3]), YUM Brands (NYSE:YUM[4]) and Burger King (NYSE:BKW[5]). Not surprisingly, Aluise favored McDonald’s over its two rivals because of its strong management team, reasonable valuation and 5%-plus dividend.

It’s important to note that all three companies have a significant exposure to China, whose economy seems to slowing. As a result, your best bet in my opinion is to buy the Consumer Discretionary Select Sector SPDR Fund (NYSE:XLY[6]), with a No. 1 holding of McDonald’s at 6.69%. It also holds YUM Brands at 2.20%. It’s cheap at 0.18%, has a reasonable amount of industry diversification and invests in some of America’s strongest brands. It’s not an exciting pick, but it will do the job.

On Tuesday, July 3, Sam Collins, InvestorPlace‘s chief technical analyst, had a total of six picks[7] for readers. Although I think Automatic Data Processing (NYSE:ADP[8]) is an excellent company filling a service (payroll) that’s always in demand, I’m going to go with Toro (NYSE:TTC[9]), whose riding lawn mowers and other landscaping products help keep golf courses and other commercial properties properly maintained.

Agriculture-related stocks also continue to do well as the world’s population rises and food production struggles to keep up. Therefore, to take advantage of Toro and the agricultural crisis, I believe the IQ Global Agribusiness Small Cap ETF (NYSE:CROP[10]) makes an excellent alternative. It has 56 holdings including Toro in the top 5 at 5.01%. Japan, the U.S. and the Netherlands account for 58% of the portfolio. My only concerns are that its expense ratio is high at 0.75% and that its average market cap is just $2 billion. I personally love investing in small caps but many others don’t.

Midweek Lawrence Meyers was talking up the major gun manufacturers[11]. Smith & Wesson (NASDAQ:SWHC[12]) and Sturm, Ruger & Co. (NYSE:RGR[13]) are both experiencing booming business. They can’t keep up with the demand as gun lovers hoard guns and ammunition leading up to the election fearful that if reelected, President Obama will infringe on their Second Amendment rights. Paranoia has always been good for the gun business, although I doubt it will last. Once we get through the election and gun owners realize the sky isn’t falling, the demand will throttle back.

I’d be hesitant to buy at this point, but if you must I have two alternatives. The first was suggested by Meyers himself, and that’s the Consumer Discretionary Select SPDR Fund, which I recommended above. It doesn’t actually own either of the gunmakers’ stocks, but it’s a good proxy. For those who want both stocks in the fund, go with the PowerShares Dynamic MagniQuant Portfolio (NYSE:PIQ[14]), which invests in 200 companies based on five criteria, including price momentum, earnings momentum, quality, management action and value.

On Thursday, Hilary Kramer was raving about Medidata Solutions (NASDAQ:MDSO[15]), a New York-based company that helps pharmaceutical companies perform their research more efficiently. Using the software-as-a-service[16] (SaaS) business model, it has a client list that includes all the major players. SaaS is a big deal these days. IT consultant Gartner (NYSE:IT[17]) estimates SaaS revenues in the U.S. will hit $14.5 billion in 2012.

There aren’t a huge number of ETFs holding Medidata, but one that does is the Guggenheim S&P SmallCap 600 Pure Growth ETF (NYSE:RZG[18]), which invests in 148 stocks within the S&P SmallCap 600 that exhibit the strongest growth tendencies. Medidata is a top 10 holding at 1.19%. Almost 28% of the fund is allocated to information technology, so you’re getting good tech exposure at 0.35% expense ratio.

Louis Navellier ended the week[19] in style, picking Anheuser-Busch InBev (NYSE:BUD[20]) and Diageo PLC ADS (NYSE:DEO[21]). The world’s biggest beer company is in the news these days after announcing it was acquiring the remaining 50% of Grupo Modelo (PINK:GPMCF[22]) it didn’t already own. While generating $600 million in annual savings through the purchase, it’s also adding a significant amount of debt. However, both companies will continue to dominate globally and are worth owning.

The SPDR S&P International Consumer Staples Sector ETF (NYSE:IPS[23]) is your best bet here with both companies in the top 10 holdings with weightings around 5%. Keep in mind this fund seeks to replicate the returns of the S&P Developed Ex-U.S. BMI Consumer Staples Sector Index and thus owns no domestic equities.

As of this writing, Will Ashworth did not own a position in any of the stocks named here. 

  1. June jobs report came out on Friday:
  2. three restaurant stocks:
  3. MCD:
  4. YUM:
  5. BKW:
  6. XLY:
  7. six picks:
  8. ADP:
  9. TTC:
  10. CROP:
  11. major gun manufacturers:
  12. SWHC:
  13. RGR:
  14. PIQ:
  15. MDSO:
  16. software-as-a-service:
  17. IT:
  18. RZG:
  19. ended the week:
  20. BUD:
  21. DEO:
  22. GPMCF:
  23. IPS:

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