Changes to the Dow
NewsBriefingSeptember 17, 2008
Call us crazy, but any Dow component that needs to get a loan from the Federal Reserve in order to avoid bankruptcy doesn't belong in the Dow Jones Industrial Average, never mind the fact that a stock trading below $5 a share doesn't either.
This means that the composition of the Dow should be changing shortly as insurer AIG (AIG) gets shown the door.
In recent moves, the editors of The Wall Street Journal who control the Dow's makeup, have made changes at a given point that have included more than one component. It is uncertain if their efforts will be concentrated on finding a single replacement for AIG or if they will take another look at the overall structure and kick out one or two other components, too.
It's reasonable to think General Motors (GM) could be on the chopping block now seeing that it hovers near $10 per share and sports a market cap under $6 billion. That, of course, begs the obvious question: what companies(y) will be tapped for Dow membership?
Before exploring that answer, let's take a moment to look back at some of the recent additions and how their stocks have performed, in a weekly period through Sept. 12, 2008, since being added to the Dow.
| Date | Company | Total Return |
|---|---|---|
| Nov. 1, 1999 | Microsoft (MSFT) | -28.4% |
| Intel (INTC) | -46.5% | |
| SBC (now AT&T)* | -11.9% | |
| Home Depot (HD) | -38.2% | |
| April 8, 2004 | AIG (AIG) | -83.2% |
| Pfizer (PFE) | -37.6% | |
| Verizon (VZ) | +16.4% | |
| Feb. 19, 2008 | Bank of America (BAC) | -16.1% |
| Chevron (CVX) | +0.02% |
*SBC merged with AT&T and changed its name to AT&T
As the table above clearly shows, being included in the Dow Jones Industrial Average of late has been more of a naming distinction than anything else. It sort of reminds us of the so-called Sports Illustrated cover curse where everything seems to be going well for a star athlete, or a leading team, until the involved party appears on the cover.
If you believe in curses, though, you might actually think the Cubs won't win the World Series this year.
Curses be damned!
The relatively poor showing of the above-named stocks has nothing to do with a Dow curse, but rather, with changing business conditions. Could the editors had better timing when they made their selections? We suppose, but hindsight is 20/20.
Nonetheless, given the performance of recent additions to the price-weighted average, don't be surprised if the newest additions go in to the sound of one hand clapping by their investors.
With that, some of the names we think could catch the eye of the editors at The Wall Street Journal include Apple (AAPL), Visa (V), Wells Fargo (WFC), Nike (NKE), U.S. Bancorp (USB), UPS (UPS), CVS Caremark (CVS), Burlington Northern (BNI), MetLife (MET), Schlumberger (SLB), General Mills (GIS), and WellPoint (WLP).
--Patrick J. O'Hare, Briefing.com