Until Warren Buffett sent his annual letter to shareholders Saturday, the highlight for stocks last week was the S&P 500 hitting its highest level since June 2008. In an otherwise slow week, investors had something to talk about. Here at InvestorPlace.com, several stocks were on the minds of our writers. In my weekly roundup, I’ll look at some ETF alternatives.
Beginning the week, crime was on Lawrence Meyers’ mind. On Feb. 20, he pointed out that Top Stocks to Invest in 2012 - Corrections Corporation of America (NYSE:CXW), the largest private prison company in the nation, is really a real estate business that happens to also run prisons. Hedge fund manager Bill Ackman owned a big position in CXW until the middle of 2011, when he moved into Top Stocks to Invest in 2012 - J.C. Penney (NYSE:JCP), likely because of the hiring of Ron Johnson, Apple‘s (NASDAQ:AAPL) former head of retail, around the same time.
Investors who like what they see at Corrections Corporation of America might consider two exchange-traded funds in its place. The first is Top Stocks to Invest in 2012 - First Trust’s Industrials/Producer Durables AlphaDEX Fund (NYSE:FXR), which takes the top stocks from the Russell 1000 index that exhibit both growth and value factors. Corrections Corporation of America has a 0.99% weighting and is one of 103 stocks in the portfolio. With an expense ratio of 0.70% and an annual turnover of more than 100%, the fund is expensive to own and not very tax efficient.
A second idea is the Rydex S&P MidCap 400 Equal Weight ETF (NYSE:EWMD), which unlike the quant fund earlier, has 400 equal-weighted stocks that are rebalanced quarterly and reconstituted annually. Although Corrections Corporation of America’s weighting is only 0.24%, its expense ratio is 43% cheaper at 0.40%. Long-term I like the Rydex fund because equal-weighted funds tend to do better than cap-weighted funds and quant funds are simply too complicated for average investors.
On Feb. 21, Tom Taulli was talking up Top Stocks to Invest in 2012 - Groupon‘s (NASDAQ:GRPN) acquisition strategy. The daily-deal site raised $700 million in its December IPO and is busily spending some of that stash in an effort to improve its technology relative to LinkedIn (NYSE:LNKD) and others. I’ve never been a fan of Groupon’s business model, but those who are will likely be interested in the Global X Social Media Index ETF (NASDAQ:SOCL), which invests in all the big names in social media, including Groupon at 3% of the portfolio.
I had previously recommended SOCL on Feb. 13 as a good alternative to Zynga (NASDAQ:ZNGA), which accounts for 4.49% of the fund. For social media, it’s the only game in town.
InvestorPlace.com editor Jeff Reeves was on Boston’s WRKO AM 680 on Feb. 22, extolling the virtues of Top Stocks to Invest in 2012 - Caterpillar (NYSE:CAT), suggesting that the maker of construction and mining equipment is a good long-term play based on its business in emerging markets and an economy that continues to recover. Back in November I picked Joy Global (NYSE:JOY) over Caterpillar as the better stock to own. After the way Caterpillar manhandled its Electro-Motive employees in London, Ontario, I’m confident I made the right choice despite short-term results indicating otherwise.
However, if you must own this labor despot, a better alternative would be to buy the Industrial Select Sector SPDR Fund (NYSE:XLI), which gives you ownership of some of this country’s biggest industrial companies, including Caterpillar at 5.67% of the portfolio. The fund has almost $4 billion in assets, its expense ratio is cheap at 0.18% and it has provided good long-term performance. Eventually, all stocks revert to the mean, and Caterpillar is due.
Kellogg‘s (NYSE:K) recent acquisition of Pringles from Procter & Gamble (NYSE:PG) for $2.7 billion made Jeff Reeves take notice on Feb. 23. It turns out P&G had a Plan B if its original deal with Top Stocks to Invest in 2012 - Diamond Foods (NASDAQ:DMND) fell apart, which it did.
Kellogg suddenly finds itself in second place in the snack-food business. I like Kellogg as a stock, but you have to wonder about the integration process given the quality-control issues the food giant has faced in the past couple of years.
Consumer-staples stocks have done well in recent years. A good defensive position that also gives you a piece of Kellogg would be to buy the Top Stocks to Invest in 2012 -Consumer Staples Select SPDR Fund (NYSE:XLP), which has an annual expense ratio of 0.18%. It has 44 holdings, including the maker of Special K at 1.25% of the portfolio. Long term, you won’t find many funds more predictable.
Jim Woods wrapped up the week on Feb. 24 talking about 24 companies that increased their quarterly dividends. The rise that most caught my attention was that of Herbalife (NYSE:HLF), which bumped its dividend by 50%, to $0.30 quarterly. With share repurchases outweighing dividend payments by 300% in the past three years, this was a good opportunity to provide shareholders with a more tangible reward.
Despite the increase, HLF’s yield is still below 2%. Consumer Staples Select is the obvious choice, but it doesn’t hold Herbalife. Instead, go for the Vanguard Consumer Staples ETF (NYSE:VDC), which has a small HLF weighting (less than 1%), but an SEC yield of 2.69%, giving you better income and diversification.
Hot Stocks to buy - Sears Holdings Stock: 3 Prosm 3 Cons
Last year, shareholders of Hot Stocks to buy - Sears Holdings (NASDAQ:SHLD) lost 57%, and they even had to deal with talks of bankruptcy.
But 2012 has been a whole new year. Rather than become the next American icon to bite the dust, Sears has watched its stock soar a stunning 124% so far this year.
So does SHLD still have room to make investors money, or would it be better to hold off? Let’s take a look at Sears’ pros and cons:
In the case of Sears, it actually has an assortment of strong proprietary brands. Examples include Kenmore, Craftsman, DieHard and Lands’ End. With more attention and investment, the company has an opportunity to leverage these assets to find growth.
Convenience: Between Sears and Kmart locations, SHLD’s extensive footprint is a competitive advantage. It not only has thousands of stores but also service centers (for example, there are nearly 800 Sears auto centers).
But Sears wants to integrate this infrastructure with its e-commerce platform and mobile technologies. This is all part of the company’s “Shop Your Way Rewards” strategy, which has the goal of creating a continuous relationship with customers. It could be an effective way to increase loyalty and sales.
Skin in the Game: Members of the Sears board control roughly 65% of the outstanding stock. Of this, ESL Investments has a 61% stake. In other words, there is strong motivation to find ways to enhance shareholder value. Eddie Lampert, who operates ESL, has a strong investment track record, with investments in great companies like Hot Stocks to buy - AutoNation (NYSE:AN) and Hot Stocks to buy - AutoZone (NYSE:AZO).
Competition: It’s brutal. While Sears restructures, it also must fend off brick-and-mortar competitors like Hot Stocks to buy - Wal-Mart (NYSE:WMT), Kohl’s (NYSE:KSS) and Best Buy (NYSE:BBY), as well as e-commerce operators like Amazon (NASDAQ:AMZN).
Macroeconomic Trends. The U.S. economy has shown renewed strength during the past few months, but it might be temporary. Consumers might once again start to pull back thanks to a recent surge in gas prices.
Sears also has shown a lack of ability to deal with changes in the economy. For example, it was not able to move quickly enough to change its inventory to adapt to the hotter winter. While companies like Hot Stocks to buy - Home Depot (NYSE:HD) and Hot Stocks to buy - Lowe’s (NYSE:LOW) were able to capitalize on warmer weather, Sears could not.
All in all, these actions certainly will help to deal with the company’s liquidity concerns. Yet they do little about the core problem of Sears — that is, getting more people to come into its stores. This will take more than financial engineering. Unfortunately, Sears still has not provided much detail on how to get back on track.
So for now, Sears’ cons outweigh the pros.
But 2012 has been a whole new year. Rather than become the next American icon to bite the dust, Sears has watched its stock soar a stunning 124% so far this year.
So does SHLD still have room to make investors money, or would it be better to hold off? Let’s take a look at Sears’ pros and cons:
Hot Stocks to buy - Pros
Proprietary Brands: These are products that retailers own, and they have become increasingly popular over the years. Reasons include better differentiation and higher margins.In the case of Sears, it actually has an assortment of strong proprietary brands. Examples include Kenmore, Craftsman, DieHard and Lands’ End. With more attention and investment, the company has an opportunity to leverage these assets to find growth.
Convenience: Between Sears and Kmart locations, SHLD’s extensive footprint is a competitive advantage. It not only has thousands of stores but also service centers (for example, there are nearly 800 Sears auto centers).
But Sears wants to integrate this infrastructure with its e-commerce platform and mobile technologies. This is all part of the company’s “Shop Your Way Rewards” strategy, which has the goal of creating a continuous relationship with customers. It could be an effective way to increase loyalty and sales.
Skin in the Game: Members of the Sears board control roughly 65% of the outstanding stock. Of this, ESL Investments has a 61% stake. In other words, there is strong motivation to find ways to enhance shareholder value. Eddie Lampert, who operates ESL, has a strong investment track record, with investments in great companies like Hot Stocks to buy - AutoNation (NYSE:AN) and Hot Stocks to buy - AutoZone (NYSE:AZO).
Cons
Losses: In 2011, Sears posted a loss of $3.14 billion, and the company has seen revenues decline for the past six years. And it’s far from clear when and if the company can reverse these adverse trends.Competition: It’s brutal. While Sears restructures, it also must fend off brick-and-mortar competitors like Hot Stocks to buy - Wal-Mart (NYSE:WMT), Kohl’s (NYSE:KSS) and Best Buy (NYSE:BBY), as well as e-commerce operators like Amazon (NASDAQ:AMZN).
Macroeconomic Trends. The U.S. economy has shown renewed strength during the past few months, but it might be temporary. Consumers might once again start to pull back thanks to a recent surge in gas prices.
Sears also has shown a lack of ability to deal with changes in the economy. For example, it was not able to move quickly enough to change its inventory to adapt to the hotter winter. While companies like Hot Stocks to buy - Home Depot (NYSE:HD) and Hot Stocks to buy - Lowe’s (NYSE:LOW) were able to capitalize on warmer weather, Sears could not.
Verdict
Last week, Sears announced a major restructuring. The company plans to raise as much as $500 million through a spinoff of its specialty Hometown and Outlet stores. There also will be a $270 million infusion from the sale of real estate assets.All in all, these actions certainly will help to deal with the company’s liquidity concerns. Yet they do little about the core problem of Sears — that is, getting more people to come into its stores. This will take more than financial engineering. Unfortunately, Sears still has not provided much detail on how to get back on track.
So for now, Sears’ cons outweigh the pros.
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