Spotting Gems Among Sector ETFs: A Look Inside PEJ

 |  Includes: EXPE, HSNI, PEJ, SBUX, SPY, WWE
by: Jim Van Meerten

All investors search for the "Holy Grail" of investing: an investment strategy that just can't miss. I should know, I've been looking for it for over 40 years and haven't found it yet. I've had to change my strategy several times. I had a new idea recently and decided to try it out. I'd like to share it with you and see what you think.

Here's my idea: Find the sector ETF that currently has the highest relative strength and try to hand pick the best stocks from that portfolio. It's the Willie Sutton Theory. Willie was a famous bank robber and was asked, "Why do you rob banks?" His reply, "Because that's where the money is!"

If as a group, these are the stocks performing the best, then why not search for the gems in the mother lode?

This week the sector ETF having the best relative strength is the Power Share Dynamic Leisure and Entertainment ETF (NYSEARCA:PEJ). The fund is a mixture of stocks from restaurants, cruise lines, time shares, to Expedia (NASDAQ:EXPE), Home Shopping Network (NASDAQ:HSNI) and even the World Wrestling Federation Entertainment Inc. (NYSE:WWE). All together, the ETF is basket of discretionary income stocks, a real mixed bag.

I used Barchart to make up a sample portfolio of the top 25 stocks in the ETF to see how it would rate, and to my surprise I had 22 buy, 1 hold and only 2 sell technical ratings. Every single stock had a positive price appreciation in the last 50 days.

The ETF had a 19.34% return in the last 50 days verses the S&P 500 return of 8.95%. 22 of the 25 stocks beat the Index. The best return was Home Shopping Network at 66.22% and the worst was Starbucks (NASDAQ:SBUX) at 7.81% just slightly less than the benchmark.

Disclosure: No positions