Thursday’s ETF To Watch: Internet HOLDR (HHH)

by on July 22, 2010 | ETFs Mentioned:

With yesterday’s bearish report from the Federal Reserve, many investors are growing increasingly wary of a double dip recession. In his report to Congress, Fed Chair Ben Bernanke said that the outlook for the economy is ‘unusually uncertain’ and that this may prompt the board “to take further policy actions as needed.” This report sent investors heading for the exits and caused most major benchmarks to fall by over 1% in a matter of minutes, leaving many to wonder, like Bernanke, which way the economy will head in the near future [also see Five ETFs For Capital Preservation].

Despite the weakness in the overall market, some internet and technology companies have reported pretty impressive earnings over the past two weeks; Apple and Intel have led the way higher for the technology sector. These companies among others, have reported stellar growth in profits, as well as increases in top-line revenue. However, most of the companies in the technology sector that have reported earnings make the hardware for computer products, not necessarily selling lower-priced goods solely through the Internet. Most of Apple’s products target the high end market, while eBay and focus more on the middle-class segment of the retail market, suggesting that these two companies provide a better picture of how the average American’s spending habits have changed as a result of a dismal outlook and high levels of unemployment [see Five ETFs For A Double Dip].

eBay and both report their quarterly earnings within 24 hours of each other. First up was eBay (EBAY), which gave its quarterly earnings report last night after the bell. The company reported earnings of $412 million, or 31 cents per share; that compares favorably with the report from last year in the same period when the company delivered profits of $327 million, or 25 cents per share. The vast majority of the growth came from its second-biggest business, online payments, which includes PayPal and short-term credit service Bill Me Later. That unit’s revenue rose 22% to $817 million, while total payment volume jumped 28% to $21.4 billion. Markets cheered the report and sent shares of the online auction company up by more than 3.5% in after-hours trading.

Given eBay’s quality report, the pressure will be on (AMZN), which reports earnings today after the bell, to keep the momentum. “The fact that eBay’s top line has rebounded to a midteens revenue growth rate is representative of the recovery being seen in e-commerce, and clearly reflects well on Amazon showing powerful growth in its report,” said Fred Moran, an analyst with Benchmark. However, AMZN has been under a lot of pressure lately as its flagship product, the Kindle e-reader device, has seen a tremendous increase in competition not only from Sony and Barnes & Noble but from Apple’s iPad (which has already sold more than 3 million units). That forced AMZN to drastically cut prices in order to remain competitive. Today’s report should reveal whether this strategy worked and helped boost volumes, or if it only cut into the company’s profit margins. The second scenario seems unlikely given reports from CEO Jeff Bezos, who called the new price ‘a tipping point’ for Kindle sales that has caused sales to surge. The company also revealed that e-book sales had accelerated, surpassing sales of hardback books [see Why Amazon's Deal With Target Could Be Good News For HHH].

Look for the Internet HOLDR (HHH) to be in focus throughout Thursday’s trading. Like most of the HOLDRS products from Merrill Lynch, the fund is heavily weighted to a few securities. HHH only holds 13 holdings in total; (39%) and eBay (18%) make up a remarkable 57% of the fund’s total assets. HHH could certainly use a boost; the fund is down 12% so far in 2010 [also see Five Facts About HOLDRs Every Investor Must Know].

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Disclosure: no positions at time of writing.