ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | August 20, 2012 9:35 am

It’s hard to believe, but last week saw the S&P 500 achieve its sixth consecutive gain, up 0.87%. Its total return year-to-date is 14.4%, with more than four months left in the year. If it keeps up the pace, the index stands a chance, albeit slight, of posting its best year in a more than a decade.

Everyone, including several InvestorPlace contributors, seems confident about stocks right now, and that means stock recommendations are available. Here then are my ETF alternatives for the week of August 13-17.

Starting out the week, IPO Playbook[1] editor Tom Taulli[2] tossed around the pros and cons[3] of investing in Google (NASDAQ:GOOG[4]). Ultimately, Taulli decided that Google’s diverse business generates substantial cash flow providing investors with growth at a reasonably price. Personally, I like what Google is doing in travel, including buying Zagat and Frommer’s in the past year. That segment could become a huge business for the tech giant.

Anyway, if you’re liking the idea of Google but want to hedge your bet with an ETF, you have to go with the First Trust Dow Jones Internet Index (NYSE:FDN[5]), which has Google as its No. 1 holding at 10.70%. The fund has 41 stocks none of which are named Facebook (NASDAQ:FB[6]). The social media site hasn’t qualified for the Dow Jones Internet Composite Index until this past Thursday because it didn’t have a three-month trading history. But forget Facebook — Google’s the star of this ETF.

On Tuesday, James Brumley[7] was trying to figure out how not to get burned by the food crisis[8] taking hold in America. Investors, including myself, are developing game plans for making money during these draught-stricken times[9]. Brumley believes that the makers of generic store brands will benefit most from consumers cutting back on their weekly grocery spending, and while he presents three possibilities, there’s no question Ralcorp (NYSE:RAH[10]) is your best bet.

Unfortunately, I’m unaware of any ETF that has a Ralcorp weighting greater than 1%. Brumley’s second choice is Treehouse Foods (NYSE:THS[11]), and although it doesn’t produce private-label cold cereal, it does make instant hot cereals like oatmeal and grits. It’s the fourth-largest holding of the PowerShares S&P SmallCap Consumer Staples Portfolio (NYSE:PSCC[12]), and the ETF has some interesting names on the list including Boston Beer [13](NYSE:SAM[14]), one of my favorite stocks (as well as InvestorPlace Assistant Editor Kyle Woodley[15]).

Midweek, blue-chip stocks[16] were the order of the day as Dan Burrows[17] provided readers with five potential big names he felt were downright bargains. Burrows performed a screen looking for stocks trading at a discount to their five-year average forward P/E as well as a couple of additional criteria. So, I’ve extended that search, looking for an ETF that owns all five at a weighting of 2.5% or more.

The closest I can come is to recommend the SPDR Dow Jones Industrial Average ETF (NYSE:DIA[18]), which holds four of the five, at an average weighting of 4.26%, The only one missing is Microsoft (NASDAQ:MSFT[19]), which of course isn’t part of the Dow.

For an alternative to Microsoft, why not go with the Vanguard High Dividend Yield Index ETF (NYSE:VYM[20]), which has the tech giant at a similar weighting to the others at just above 4% and a bargain-basement expense ratio of 0.13%. It’s not a perfect alternative, but you should do just fine.

On the penultimate day of the business week, Portfolio Grader had fashion on the brain[21], highlighting five fashion and apparel stocks with an improved grade. The stock with the best rating was Movado (NYSE:MOV[22]), a maker of watches and accessories. Its stock is up 146% in the past year, and its turnaround appears complete.

For those interested in Movado but concerned about the big move in its price, I’d suggest going with the PowerShares Dynamic Consumer Discretionary Sector Portfolio (NYSE:PEZ[23]), which holds 57 of the best consumer discretionary stocks, including Movado at 1.37%. Based on the Dynamic Consumer Discretionary Sector Intellidex Index, it hasn’t done nearly as well as the S&P Consumer Discretionary Index over the past three years. But with Movado in the mix, I think that’s about to change.

Finishing up the week, Kyle Woodley examined both the bullish and bearish cases for Discover Financial Services[24] (NYSE:DFS[25]), a stock he’s been enamored with for some time. Last September, I argued that Discover’s shareholders should consider selling their shares[26] because they’d be lucky to hit $30. Boy was I wrong — and Woodley right! Trading near $38, the stock’s exceeded expectations yet continues to be reasonably priced.

If you’re not afraid of a little volatility, Woodley believes you’ll do fine in the long run. My experience tells me you should listen to the man. However, if you find yourself worried about reversion to the mean, go with the PowerShares Fundamental Pure Mid Core Portfolio (NYSE:PXMC[27]), which uses fundamental measures like book value, income, sales and dividends to weight stocks as opposed to market capitalization. Discover Financial Services is its No. 1 holding at 1.93% of the portfolio. Most important, mid-cap stocks have a history of outperforming all others.

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

  1. IPO Playbook:
  2. Tom Taulli:
  3. pros and cons:
  4. GOOG:
  5. FDN:
  6. FB:
  7. James Brumley:
  8. food crisis:
  9. making money during these draught-stricken times:
  10. RAH:
  11. THS:
  12. PSCC:
  13. interesting names on the list including Boston Beer :
  14. SAM:
  15. Kyle Woodley:
  16. blue-chip stocks:
  17. Dan Burrows:
  18. DIA:
  19. MSFT:
  20. VYM:
  21. fashion on the brain:
  22. MOV:
  23. PEZ:
  24. bullish and bearish cases for Discover Financial Services:
  25. DFS:
  26. selling their shares:
  27. PXMC:

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