PEJ: Investing On The Go

| About: PowerShares Dynamic (PEJ)

Summary

PEJ shares have performed extraordinarily well since the Great Recession of 2008.

The fund is very focused on casual dining, leisure & hospitality and airlines.

Low energy prices might be an underlying driver of the fund.

"Discretion" is defined, simply, "as the freedom to decide what should be done in a particular situation." In the world of finance, the word "discretion" has wide and varied application. Most often, it's used to describe a type of spending. In government, discretionary spending may best be described as spending via appropriations, in particular, allocating tax dollars for a particular purpose. This is different than government entitlement spending like pensions or social security payments. Those are non-discretionary. In business, discretionary spending is more precisely termed discretionary expense. In this case, it's spending which is not essential for the functioning of the enterprise. For example, the proverbial annual company picnic. Most importantly, discretionary spending also refers to a type of consumer spending, in particular, the spending of that portion of income in excess of what is needed to run the households and pay the bills. In other words, what consumers do with leftover cash after the mortgage or rent, utilities, insurance, loan payments, auto maintenance, groceries and clothing expenses are have all been satisfied; i.e., non-discretionary expenses. Some of that capital may be appropriated towards a family night out at the movies or perhaps a favorite casual dining spot or even a one-time extravaganza week at a theme park, a tropical island vacation or casino and entertainment resort.

Obviously, when times are good, jobs secure, everyone is feeling confident and earning money in excess of what's needed for the bare necessities, then those companies which provide discretionary types of consumer goods or services profit. This collection comprises the Consumer Discretionary Sector. According to Investopedia:

Consumer discretionary refers to the sector of the economy that consists of businesses that sell nonessential goods and services. Companies in this sector include retailers, media companies, consumer services companies, consumer durables and apparel companies, and automobiles and components companies.

There are many ETFs which cover the entire consumer discretionary kit and caboodle. However, for those investors which are in a good position to undertake a little more risk in their portfolio Invesco offers a very specific ETF covering a subset of the consumer discretionary sector. It comes from the PowerShares collection of ETFs and focuses on, essentially, two subsectors of the consumer discretionary, Restaurants and Hospitality, as well as one strongly related industrial sector, Airlines. This is the PowerShares Dynamic Leisure and Entertainment Portfolio ETF (NYSEARCA:PEJ).

The fund tracks the Intellidex's Dynamic Leisure and Entertainment Index (DZL). The index is designed to:

... provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value...

At first glance, the fund looks a bit too restricted; however, the chart since its June 2005 inception proves otherwise.

Click to enlarge

Most remarkably, PEJ really took off towards the end of 2008, when the global economy was still reeling from the aftershock of the collapse of subprime mortgages and global credit markets. So far this year, the returns have been less than 1% and negative over the past 52 weeks. However, over the past 5 years, it has returned a solid 14.75% and has nearly tripled since its June 2005 inception. The recent returns might indicate a decline in discretionary spending. The opportunity to establish an entry position at a better price point might be in the offing.

It's important to note that the returns have been mostly through the capital appreciation of the fund, precisely for which it is designed. When it comes to dividends, it's a different story. The fund has yielded a mere 0.22% over the past 12 months, and the total expense ratio is somewhat high at 0.63%. The fund's P/E is 14.40, below the S&P P/E of 18, and it trades at about 3.79 times book value. Also, PEJ currently trades at a one penny per share discount to its NAV; total NAV is approximately $173.37 million. There are 4.60 million shares outstanding, and the previous three-month average daily trading volume is 52,389 shares, hence it has good market liquidity.

Performance

Year to Date

1-Year

3-Year

5-Year

10-Year

Since Inception 6/23/2005

ETF Shares

0.47%

-3.31%

12.25%

14.75%

9.51%

9.82%

NAV

0.58%

-3.21%

12.29%

14.76%

9.49%

9.82%

Index

0.76%

-2.52%

13.11%

15.65%

10.15%

10.49%

Click to enlarge

Data from PowerShares

The fund is most heavily weighted by Airlines. Low fuel prices as well as optimal seating configurations have made airlines one of the best-performing sectors. PEJ's airline holdings average $7.45 in earnings per share. The fund holds the industry leaders: Southwest (NYSE: LUV), United Continental (NYSE: UAL) and American Airlines Group (NASDAQ: AAL) as well as some of the best smaller players. It should be noted that Alaska Air Group (NYSE: ALK) has recently acquired Virgin America (NASDAQ: VA), which is also a fund holding. JetBlue (NASDAQ: JBLU) was also in the running to merge with VA, but lost out to ALK. The combined annual revenue of the two merged airlines has been estimate at $7.1 billion, potentially serving an estimated 39 million passengers annually - the 5th largest US airline. Lastly, airlines comprise about 34.75% of the fund's total holdings.

Airlines 37.227

Market Cap (in USD billions)

Yield

Dividend

EPS

% Div to EPS

Total Debt/Equity

Institutional Interest

Southwest Airlines

$30.042

0.64%

$0.08

$3.27

2.446%

45.43%

80.31%

United Continental Holdings

$20.455

0.00%

$0.00

$19.51

0.000%

115.99%

98.36%

American Airlines Group

$24.669

0.98%

$0.10

$11.29

0.886%

368.31%

74.85%

Delta Air Lines (NYSE: DAL)

$36.650

1.14%

$0.14

$5.95

2.353%

75.11%

86.91%

Virgin America

$2.093

0.00%

$0.00

$7.67

0.000%

38.08%

75.88%

Hawaiian Holdings (NASDAQ: HA)

$2.689

0.00%

$0.00

$3.00

0.000%

173.10%

86.43%

SkyWest (NASDAQ: SKYW)

$1.059

0.78%

$0.04

$2.28

1.754%

129.37%

86.53%

Alaska Air Group

$10.234

1.34%

$0.28

$6.57

4.262%

28.45%

90.50%

Allegiant Travel Co. (NASDAQ: ALGT)

$2.992

0.67%

$0.30

$13.01

2.306%

183.33%

80.49%

JetBlue Airways

$6.708

0.00%

$0.00

$1.97

0.000%

57.41%

86.84%

Averages

$13.759

0.56%

$0.09

$7.45

1.401%

121.46%

84.71%

Click to enlarge

Data from Reuters, Yahoo and company websites

As noted, airline companies are usually categorized as industrials and are essentially in a class by themselves. However, consumer discretionary includes many categories, including automobile manufacturers and big ticket appliances. In the case of this fund, there are just two categories of consumer discretionary: restaurants and leisure & hospitality, along with one purely media-entertainment holding: Starz (NASDAQ: STRZA). Starz is primarily a premium program subscription services, with 23.6 million enrolled viewers, 17 channels, on-demand programming and distributes via satellite, cable, telecom and online digital platforms. Keep in mind that premium subscription networks are an important selling point for resort hotel rooms, and hence, are less likely to be cut during slower booking periods.

Restaurants 33.748

Market Cap

Yield

Dividend

EPS

% Div to EPS

Total Debt/Equity

Institutional Interest

McDonald's Corp. (NYSE: MCD)

$115.208

2.79%

$0.89

$4.81

18.503%

340.33%

72.22%

Starbucks (NASDAQ: SBUX)

$89.440

1.32%

$0.20

$1.63

12.270%

39.25%

71.64%

Sonic Corp. (NASDAQ: SONC)

$1.705

1.25%

$0.11

$1.34

8.209%

NA

0.00%

Wendy's Co. (NYSE: WEN)

$2.950

2.19%

$0.06

$0.47

12.766%

322.23%

80.30%

Ruth's Hospitality (NASDAQ: RUTH)

$0.600

1.57%

$0.07

$0.88

7.955%

0.00%

89.12%

Domino's Pizza (NYSE: DPZ)

$6.976

1.10%

$0.38

$3.49

10.888%

NA

0.00%

Texas Roadhouse (NASDAQ: TXRH)

$3.054

1.75%

$0.19

$1.37

13.869%

3.84%

90.36%

Panera Bread (NASDAQ: PNRA)

$5.122

0.00%

$0.00

$5.81

0.000%

81.68%

0.00%

Darden Restaurants (NYSE: DRI)

$8.136

3.12%

$0.50

$2.61

19.157%

23.34%

89.34%

Denny's Corp. (NASDAQ:DENN)

$0.780

0.00%

$0.00

$0.42

0.000%

0.00%

93.36%

BJ's Restaurants (NASDAQ: BJRI)

$1.040

0.00%

$0.00

$1.73

0.000%

31.76%

94.73%

Averages

$21.365

1.37%

$0.22

$2.23

9.420%

93.60%

61.92%

Click to enlarge

Data from Reuters, Yahoo and company websites

Included in the restaurant holdings are, once again, the top-tier casual dining companies McDonald's Corp. and Starbucks, as well as what might be best described as second-tier casual dining companies such as Sonic Corp. and Domino's Pizza, for examples. It should be noted that there are far more casual dining companies here than meets the eye. Darden Restaurants is a corporate group of "theme cuisine brands", including Olive Garden, Longhorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House.

Consumer Discretionary 29.023%

Market Cap

Yield

Dividend

EPS

% Div to EPS

Total Debt/Equity

Institutional Interest

Priceline (NASDAQ: PCLN)

$66.084

0.00%

$0.00

$49.68

0.000%

70.02%

96.53%

Carnival Corp. (NYSE: CCL)

$38.755

2.74%

$0.35

$2.38

14.706%

40.08%

82.47%

Boyd Gaming Corp. (NYSE: BYD)

$2.362

0.00%

$0.00

$0.42

0.000%

643.66%

79.59%

Dave & Buster's Entertainment (NASDAQ: PLAY)

$1.738

0.00%

$0.00

$1.38

0.000%

97.66%

97.82%

Six Flags (NYSE: SIX)

$5.424

3.99%

$0.58

$1.58

36.709%

NMF

89.53%

Churchill Downs (NASDAQ: CHDN)

$2.439

0.78%

$1.15

$3.71

30.997%

126.67%

68.04%

Starz

$2.546

0.00%

$0.00

$2.21

0.000%

476.71%

87.54%

Vail Resorts (NYSE: MTN)

$4.800

2.45%

$0.81

$3.14

25.796%

82.74%

0.00%

Cedar Fair (NYSE:FUN)

$3.287

5.62%

$0.82

$1.98

41.414%

NMF

54.77%

Averages

$14.159

1.73%

$0.41

$7.39

16.625%

219.65%

72.92%

Click to enlarge

Data from Reuters, Yahoo and company websites

Most holdings in this last group are leisure & hospitality companies, with the exception of Starz, as noted above. Priceline is a digital portal with a specialized search engine to match up "name your own price" customer requests for available airline tickets and available hotel rooms. It should be noted that Priceline was one of the original internet business model companies and a very successful survivor of the post-internet bubble bust. Cruise ship resort Carnival Corp. operates under several brand names, including Carnival, Princess, Holland America, Seabourn, Costa, AIDA, P&O, Cunard as well as hotels and lodges. Again, there are more cruise line brands here than first meets the eye. One interesting gaming holding is Churchill Downs, initially the racetrack sponsor of the famous Kentucky Derby, and now evolved into a diversified gaming company holding five race tracks, six casinos, digital games, video poker, off-track betting and a provider of race horse data.

At first glance, the fund appears too focused and somewhat disconnected. However, that doesn't seem to be the point. PEJ is cleverly constructed (via the DZL index) and has performed very well since inception. However, the potential investor needs to consider the recent unusually low fuel costs, of which airlines have wisely taken full advantage. The underlying driver for the fund's capital appreciation may have been due in large part to fuel costs rather than to exuberant consumer confidence.

The restaurant group is indeed discretionary, but composed mainly of affordable casual dining restaurants. These types of restaurants are sometimes referred to as "affordable luxuries" and do well even in slow economies. Lastly, the fund diversifies the remaining holdings, which smartly include companies with digital-based revenue streams. Also, what shouldn't go unnoticed are the water/fun park companies like Six Flags and Cedar Fair. These fun parks are not only popular resort destinations, but also extremely popular for local visitors who live within a few hours' driving distance; they make for popular and relatively inexpensive one-day "staycation" visits.

Click to enlarge

Hence, with fuel prices near all-time lows, PEG might have a hidden risk; however, it might be worth an entry position on a sufficient pullback. But keep in mind that its P/E is already below the S&P's average P/E.

And one last word of advice about those fun parks: If you plan on a staycation and you have the urge to jump on one of those spiraling, looping rollercoasters with the kids but haven't had any type of astronaut training, bring Dramamine.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.