Friday’s ETF To Watch: Merrill Lynch Internet HOLDR (HHH)

by on January 28, 2011 | ETFs Mentioned:

Today’s market has been especially rough for consumer product companies such as Johnson & Johnson, Colgate Palmolive, and Procter & Gamble, which have all sunk on weak guidance thanks to disappointing growth in developed markets. While these product makers have tumbled some had hoped that the key retailers would be able to avoid this malaise and continue posting strong growth figures with high margin levels. This hope was put to the test last night after the bell when one of the biggest retailers in the world, (AMZN), gave its earnings report for the most recent quarter.

For the quarter, AMZN reported earnings of 91 cents a share on revenues of $12.95 billion. Although Amazon beat consensus earnings by three cents it missed revenue marks by $20 million, a fact which caused a massive sell-off in the company, pushing shares down by close to 10% before ending the after-hours session down roughly 9% or a loss of close to $16.5/share. In addition to this revenue miss, investors were also likely concerned by the declining margins that the retail giant posted. Operating margins came in at just 3.8%, a far cry from the 4.2% margin that analysts had been expecting for the company. “Investors have been willing to forgive Amazon on margin disappointment as long as they exceeded top-line expectations, but this quarter they disappointed for top-line, and investors do not like that with growth stories such as Amazon,” said Sandeep Aggarwal of Caris & Co. [see Internet ETFs: Five Ways To Play].

The numbers are especially disappointing to investors who had assumed that the company was poised to report solid levels of sales growth thanks to robust holiday sales, a sentiment that had helped to push the stock up more than 5% before the earnings announcement. However, heavy infrastructure spending– including 13 new distribution centers in 2010– and increased marketing kept higher sales from leading to greater profits for the company. AMZN’s forecast didn’t help matters either; the company said that Q1 operating profits could fall anywhere from 2%-34%, or roughly $90 million less than Street expectations, and that is on the high end.

Due to this earnings report and low quality guidance, investors should look for the Merrill Lynch Internet HOLDR (HHH) to remain in focus throughout today’s trading session. The fund allocates a near-majority of its holdings to the internet retailing giant, with close to 42% of total assets going towards In addition to this heavy weighting, the fund also offers investors a 18.5% weighting in eBay, an 11.1% allocation to Yahoo, and close to 10.7% in [see more holdings of HHH here].

The fund has posted robust returns for investors as of late, surging by 43.8% in the past half year period alone. However, HHH has seen difficult in recent weeks which has helped to send prices of the fund down by 1.7% over the past two weeks. Given the horrendous after hours performance by the fund’s top component, investors should look for losses to accelerate in the fund in today’s session, possibly pushing HHH down significantly for the day [also read Five Facts About HOLDRs Every ETF Investor Must Know].

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Disclosure: No positions at time of writing.