The house rules are simple in this weekly column.
- I bash a stock that I think is heading lower.
- I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Invesco
More mud than flap
Scottrade's move to roll out 15 commission-free exchange-traded funds this morning marks another win for individual investors. The discounter will offer these funds with expense ratios as low as 0.05%, raising the bar by lowering the tab for you and me.
Rival brokers, mutual fund families, and ETF managers may cringe, but Invesco will suffer the gravest blow. The financial giant owns PowerShares, the huge ETF pioneer with more than 120 exchange-traded options for investors. Scottrade's gutsy push -- following last year's moves by rival brokers to either offer third-party ETFs, or roll out proprietary low-cost funds sans commissions -- will force management fees lower in an overcrowded marketplace.
Scottrade's proprietary Focus Morningstar funds also stand out, in that sector funds compose 11 of the 15 offerings. We're not just limited by market cap here. Invesco operates more than a dozen sector funds, commanding expense ratios far exceeding 1%.
Invesco has done a stellar job of riding bull markets, taking advantage of this highly fragmented sector to make timely acquisitions during market lulls. It's hard to bet against the juggernaut, but the trends seem to be pushing investors toward either individual equities or dirt cheap, commission-free ETFs.
Invesco's strongholds are being disrupted, which may explain why analysts see revenue climbing by a mere 4% next year. Wall Street feels that Invesco's earnings will grow considerably faster, but I can see that number working its way back down once the gravity of the situation is absorbed.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho.
Scottrade isn't publicly traded, but the broker that kicked off the push for proprietary ETFs as commission-free investments is also the leading discounter. Mutual fund operators have performed well during the era of individual investor empowerment, but the better bet now rests with discounters, who'll be less susceptible to a price war. TD AMERITRADE
China Finance Online
Individual investors are also empowered in China, leaving the providers of premium research there struggling for elbow room. A ho-hum quarterly report rocked China Finance Online shares last week; its number of premium subscribers has soared 32% over the past year, but price slashing forced the Chinese dot-com to post a slight dip in year-over-year revenue in the fourth quarter. Its outlook doesn't call for relief in 2011.
So why is this company even on the replacement list? Check the balance sheet. China Finance Online now trades for less than both the value of its cash position and its book value. This happens to red-inked companies often, but China Finance Online posted an adjusted profit every single quarter in 2010, and it's targeting positive adjusted net income for the year ahead.
Let's get one step ahead of this craze. Commission-free trading will encourage itchy trigger fingers, making Schedule D forms a lot longer for investors in taxable accounts. Complicated returns are meat and potatoes to the maker of TurboTax filing software. H&R Block
I'm sorry, Invesco. You're Out-vesco this time.