ETF Alternatives for Last Week’s Hot Stocks

by Will Ashworth | January 28, 2013 2:44 pm

Wall Street had another winning week, with the S&P 500‘s 1.1% gains between Jan. 21-25 pushing its year-to-date returns to 5.4%. Stocks continue to gain acceptance over bonds, lifting prices ever higher.

With little bad news in the picture at this point, investors are eager for stock ideas, which our InvestorPlace contributors gladly provided. Here are some of my ETF alternatives:


Starbucks (NASDAQ:SBUX[1]) delivered first-quarter earnings Jan. 24, and as usual, they were first-rate. Same-store sales were up 6% across the company, earnings per share grew 14% to 57 cents, and revenues were up 11% to $3.8 billion. The only miss for the coffee giant was on the top line, where it missed revenue estimates by a mere $50 million.

James Brumley feels Starbucks’ premier valuation[2] leaves little room for error. The slight chink in its armor could provide the selling pressure necessary to move the stock lower, allowing a better entry point. That’s possible. Or, it might keep moving up as it has since 2008.

Forget market timing and instead go with the Consumer Discretionary Select Sector SPDR (NYSE:XLY[3]), which has Starbucks at a 2.61% weighting and part of its top 10 holdings. One of the best-performing sector ETFs over the past year, the XLY also has performed admirably over the past three-year, five-year and 10-year periods. At 0.18%, it gives you an inexpensive alternative to Starbucks while also gaining exposure to 85 of the best consumer discretionary stocks available.

Boeing/General Electric

Talk about going out on a limb. Jonathan Berr recommended Boeing (NYSE:BA[4]) on Jan. 24, suggesting the nightmare that is the 787 Dreamliner[5] will eventually pass — and when it does, the stock will soar. Never before has so much new technology been incorporated into a single plane. The almost four-year delay in the 787s delivery foreshadowed problems to come. It will take time to get through the review, and by the time it does, CEO James McNerney might not be in charge. Boeing should have promoted Ford (NYSE:F[6]) CEO Alan Mulally when it had the chance.

Regardless of who is the CEO, the world’s biggest plane manufacturer will rise above it. At current prices, it’s definitely undervalued compared to its peers.

For those not so sure about Boeing’s short-term future but a fan of its stock, I suggest the Industrial Select Sector SPDR (NYSE:XLI[7]), which has Boeing as the eighth-largest holding at a weighting of 3.71%. Aerospace and defense sectors represent 24% of the portfolio, which is about as much as you’d want given the difficulties facing defense contractors these days. An inexpensive management fee of 0.18% and a 30-day SEC yield above 2% certainly doesn’t hurt.

One warning — if you’re not a fan of General Electric (NYSE:GE[8]), you won’t like this particular ETF; GE is by far the biggest holding in the 62-stock portfolio. However, if you’re a fan of General Electric, as Lawrence Meyers is, then you’ll be able to kill two birds with one stone.

Meyers likes GE for a lot of reasons, the most obvious being is tremendous diversification[9]. Its jet engine unit sells a lot of engines, so many that it has $210 billion in backlog orders. It’s that kind of financial clout that allows it to hit all the emerging markets it feels are growing faster than the global average. With $130 billion in cash and annualized free cash flow of $20 billion, it has all the money Jeffrey Immelt needs to keep it expanding.

With GE the largest holding in the XLI (12.05% weighting), you get both GE and its jet engines, as well as a 3.71% weighting in Boeing.


InvestorPlace contributor Dan Burrows also was high on an industrial conglomerate[10] last week — but rather than GE, Burrows was big on 3M (NYSE:MMM[11]) instead. 3M is expected to grow its earnings 9.7% annually over the next five years, which is 300 basis points higher than the average for the five just passed. Its operating margins are rock-solid at 22%, helping it generate more than $7 per share in cash. 3M has paid a dividend since 1916, so its annual total return is well balanced between capital appreciation and dividend yield.

It’s a boring stock that keeps producing.

While a third time might be a charm (3M is a top-10 holding in the XLI), I’m going to focus my ETF alternative recommendation on the dividend dependability of 3M. The Vanguard Dividend Appreciation ETF (NYSE:VIG[12]) has a 30-day yield of 2.28% from its 133 stocks, including 3M, which is a top-10 holding. Like all Vanguard funds, its annual expense ratio of 0.13% is lower than 88% of funds with similar holdings. Most importantly, this is a group of companies consistently increasing their dividends.


Closing out the week, InvestorPlace Assistant Editor Marc Bastow was busy highlighting seven companies that have recently increased their dividend[13]. Rather than recommend a dividend fund like the VIG in the previous paragraph, I’m going to focus on the company I like best from Bastow’s group of seven: Realty Income (NYSE:O[14]), a retail REIT that raised its quarterly dividend 19% to 18.1 cents per share, providing investors with a 4.98% yield. Realty Income recently completed its acquisition of American Realty Capital Trust (NASDAQ:ARCT[15]), making it the largest owner of triple-net lease retail properties in the country.

The best alternative here is the iShares FTSE NAREIT Retail Capped Index Fund (NYSE:RTL[16]), which seeks to replicate the performance of the FTSE NAREIT Capped Index, a group of 32 holdings that includes Realty Income at a weighting of 6.21%. The biggest holding in the ETF is Simon Property Group (NYSE:SPG[17]) at a whopping 22.7% weighting. Simon is expanding overseas and should be able to grow for some time, making this concentration a good thing. With a 30-day SEC yield of 2.99%, it’s not quite as high as Realty Income’s, but it’s good nonetheless.

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

  1. SBUX:
  2. Starbucks’ premier valuation:
  3. XLY:
  4. BA:
  5. 787 Dreamliner:
  6. F:
  7. XLI:
  8. GE:
  9. tremendous diversification:
  10. industrial conglomerate:
  11. MMM:
  12. VIG:
  13. seven companies that have recently increased their dividend:
  14. O:
  15. ARCT:
  16. RTL:
  17. SPG:

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