Bundle Up Caterpillar: ETF Alternatives for Hot Stock Picks

by Will Ashworth | April 29, 2013 1:21 pm

Before last week, it looked as though the markets had ground to a halt. That all changed when first-quarter earnings report were mostly as expected, and the sigh of relief resulted in a 1.74% gain for the S&P 500 to help it push back into double-digit returns for the year.

InvestorPlace contributors were busy finding stocks to take advantage of the rebound. Here are my ETF alternatives to those stock recommendations:

Natural Gas

My first ETF alternative comes from InvestorPlace editor Jeff Reeves, who was jumping on the natural gas bandwagon[1] April 23, recommending a triumvirate of stocks: Encana (NYSE:ECA[2]), Devon Energy (NYSE:DVN[3]) and Southwestern Energy (NYSE:SWN[4]). All have impressive natural gas holdings, so if you believe natural gas has a bright future, any of these would fit nicely in your portfolio.

The alternative here is a simple one. The Market Vectors Unconventional Oil & Gas ETF (NYSE:FRAK[5]) is a 48-stock portfolio of companies involved with coal bed methane (CBM), coal seam gas (CSG), shale oil, shale gas, tight natural gas, tight oil and tight sands. All three stocks are represented in the top 11 holdings — Devon Energy is the biggest weighting of the trio at 5.27%. Slightly more than a year old, I can see this ETF becoming more popular.


Caterpillar (NYSE:CAT[6]) delivered ugly earnings[7] last week, but surprisingly, its stock went up. James Brumley reckons investors previously took the company’s earnings’ warnings in January to heart, driving its stock down much farther than fundamentals warranted. With a forward P/E ratio of slightly more than 10, CAT sits well below its industrial sector peers. Given its share price has taken the bad news for 2013 into account, it’s time to buy.

When there are several options available, I always like to go with the cheapest one. In this particular case, it’s the Vanguard Industrials ETF (NYSE:VIS[8]) with an annual expense ratio of 0.14%. Its total net assets are $735.1 million, with Caterpillar its seventh-largest holding at 3%. Consisting of 358 industrial sector stocks, the average P/E ratio of the holdings is 18.8 — almost double Caterpillar’s multiple. While Brumley’s analysis makes logical sense, buying the ETF protects you on the downside should Caterpillar’s stock not rebound as expected.


Tom Taulli recommends investors take advantage of Qualcomm‘s (NASDAQ:QCOM[9]) selloff last week and buy on the temporary dip. With the company benefitting from the global move to smartphones[10] — 700 million sold in 2012 — Taulli sees a great deal of upside for its stock. QCOM, which has approximately $30 billion in cash and marketable securities on the balance sheet and generating $6.5 billion in annual cash flow over the past year, is as solid as they come.

My ETF alternative kills two birds with one stone. The iShares Dow Jones U.S. Technology Sector Index Fund (NYSE:IYW[11]) has 136 holdings that represent the largest companies in technology, and Qualcomm is a top 10 holding with a weighting of 4.56%. A popular ETF with $1.8 billion in total net assets, IYW hasn’t done much in 2013, up just 1.6% through April 26, but it has performed consistently in the past. Buying the IYW allows you to own Qualcomm while also benefiting from any future revival in tech stocks.


UPS (NYSE:UPS[12]) vs. FedEx (NYSE:FDX[13]) is a debate that has captivated investors for years. Dan Burrows weighed in on the subject last week. Burrows feels that although UPS has handled the global slowdown more adeptly, FedEx’s stock is the better play[14] at present. With better long-term growth prospects and a cheaper stock valuation, the upside for FedEx is more than double UPS.

Forget about picking the better stock of the two and buy the iShares Dow Jones U.S. Transportation ETF (NYSE:IYT[15]). From railroads to trucking companies to airlines, the health of these 20 businesses indicate the overall health of the U.S. economy. FedEx and UPS are both weighted at 7.41%, tied for third in the $561 million portfolio’s holdings.


The last stock recommendation I’ll look at is from Traders Reserve, which sees Apple (NASDAQ:AAPL[16]) as a consumer products company[17] and not some tech biz with a few neat toys. Of the arguments made to support its thesis, I think the best one is that Macs saw 7.4% growth in 2012 — the only PC maker to do so. Further, with Apple introducing new products every three years[18] or so, the iTV is just around the corner. That will have a profoundly positive effect on its stock price.

Doubling up with the Qualcomm pick from earlier, the ETF alternative in this case is the IYW, which has Apple as its top holding at a weighting of 16.35%. If you think that Apple has been hammered mercilessly — as I do — this is a good way to make a big bet on AAPL while protecting your downside and simultaneously investing in the technology sector in general.

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

  1. natural gas bandwagon: https://investorplace.com/2013/04/3-explosive-gas-stocks-to-buy-now/view-all/
  2. ECA: http://studio-5.financialcontent.com/investplace/quote?Symbol=ECA
  3. DVN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVN
  4. SWN: http://studio-5.financialcontent.com/investplace/quote?Symbol=SWN
  5. FRAK: http://studio-5.financialcontent.com/investplace/quote?Symbol=FRAK
  6. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  7. ugly earnings: https://investorplace.com/2013/04/buy-or-sell-caterpillar/
  8. VIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIS
  9. QCOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOM
  10. global move to smartphones: https://investorplace.com/2013/04/bite-on-the-qualcomm-dip/
  11. IYW: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYW
  12. UPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UPS
  13. FDX: http://studio-5.financialcontent.com/investplace/quote?Symbol=FDX
  14. FedEx’s stock is the better play: https://investorplace.com/2013/04/ups-vs-fedex-which-stock-is-the-better-buy/
  15. IYT: http://studio-5.financialcontent.com/investplace/quote?Symbol=IYT
  16. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  17. consumer products company: https://investorplace.com/2013/04/apple-earnings-ignore-them-and-think-long-term-aapl-bbry/
  18. every three years: https://investorplace.com/2013/04/apple-vs-exxon-which-is-the-better-buy/

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