How Stocks Perform After Being Added to the Dow

Many have been wondering lately which company will take the place of GM in the Dow Jones Industrial Average, if the company happens to file chapter 11. GM has been listed on the Dow since August 31, 1925 (second oldest only to General Electric (GE)). In my opinion, whether GM files chapter 11 or not, getting delisted from the Dow seems inevitable. There are so many other strong American companies that deserve to be in the Dow Jones in place of GM. A short while back I started a contest on my blog to see who could guess the next component of the Dow being delisted. Currently almost 75% of the votes are for GM and the rest for either Bank of America (BAC) or Citigroup (C).

I have been doing some research and I have found that once a company is added to the Dow (last 5 additions) the price of the stock rises on averages 5.16% in the first three months, and 6.58% in the first 6 months of being added to the index. Below are some of the most recently added stocks, the date, (all stocks added the last 5 times the index has changed), and their performance over 3 months and 6 months respectively.

• Bank of American (BAC) Feb 19, 2008 -15.28% -28.1%
• Chevron (CVX) Feb 19, 2008 +20.07%, +0.78%
• Citigroup (C) March 17, 1997 +19.48%, +24.41%
• Hewlett-Packard (HPQ) March 17, 1997 -3.83%, +20.98%
• Home Depot (HD) Nov 1, 1999 +36.09%, +5.41%
• Intel (INTC) Nov 1, 1999 +6.29%, +59.32%
• Johnson & Johnson (JNJ) March 17, 1997 +14.68%, -0.65%
• Kraft (KFT) Sep 22, 2008 -23.19%, -36.69%
• Pfizer (PFE) April 8, 2004 -5.71%, -17.21%
• Verizon (VZ) April 8, 2004 -3.14%, +9.36%
• Wal-Mart (WMT) March 17, 1997 +11.30%, +34.78%

In my opinion I think Google (GOOG) should and will replace General Motors on the Dow. The majority of the guesses on my blog for the component to be added were for the following (in order from most guesses to least): Apple (AAPL), Research in Motion (RIMM), Google, Goldman Sachs (GS), and Visa (V). Although Visa is a great company, I do not think it has a very good chance, as it is not even listed in the S&P 500 yet (soon it will be as its market cap is bigger than both MA and AXP combined).

Whether or not these averages mean anything (stocks being added during bull and bear markets will make a big difference), in my opinion it is a good sign for a company to be added to the index. Time will soon tell how the Dow will be reshuffled.

Please feel free to share your thoughts on which companies are good candidates for the Dow.

Disclosure: Long BAC, PFE, GOOG, GS, AXP, V.

Comments

[Tdot:]

Google is not an "Industrial" company. Neither are the other candidates mentioned. The intent of the Dow Jones Industrial Average was to measure the performance, good or bad, of Industrial Manufacturing as a surrogate for the economy as a whole. It was not intended to cherry-pick after marvelously speculative, high "market" cap inventions with virtually zero "real" capitalization (factories, production capacity, etc.). For better or worse, the Industrial Averages are supposed to measure what they are, not what they wish to be. If the Dow wants to go after Silicon Valley helium balloons again, then it should no longer be called the Dow Industrials. Call it the Non-Capital Dow Un-industrial Averages or something.

But for some real Dow Industrials, why not Ford? Very global, Market cap (today) is $15B, and Enterprise Value is $132B. Can't get more industrial than that. And its value can rise or fall with the general economy - cannot get artificially propped up with a few party balloons just waiting to get popped in the next SEC raid.

May 28 07:06 AM

[brewer:]

I agree with Tdot to some extent. However, it would not seem unreasonable to put a technology firm in the DOW. BUT, it should not be Google, as Tdot said, they don't produce anything tangible. I'd vote for Apple or Intel, either of which are much more 'industrial' than Google.

May 28 09:35 AM

[Ron G:]

I think they are going to put an insurer in the Dow. Espcially since that sector isnt represented since AIG got kicked out.

May 28 10:16 AM

[BuffettMaster:]

Once again, the corruption of Wall Street is apparent. Berkshire Hathaway is by far the largest corporation not in any of the indexes. It is clearly an industrial company and has heavy insurance exposure. It does not have options traded on it, and the price is "weird", so it is excluded. Sometimes when you ask "why", the answer simply isn't good enough.

May 28 11:00 AM

[waf76:]

I'm guessing a pharmaceutical

May 28 11:28 AM

[Andy Zaky:]

Ok. I cannot comprehend for the life of me why people think Google should be added to the dow rather than any of these other companies you've listed? In fact, none of those companies ought to be added because they're all high beta stocks. High beta stocks would keep volatility high in the index and thus drive away potential investors who see it as uncertainty in the market. But why Google in particular? Google is small beans compared to some of the other companies you mention. Apple is a far more viable candidate than Google as Apple's financial are far superior on nearly every front. See for yourself:

Apple
Cash: $28 Billion
2009 Expected Revenue: $35.4 Billion
2010 Expected Revenue: $40.9 Billion

Google
Cash: $17 Billion
2009 Expected Revenue: $16.79 Billion
2010 Expected Revenue: $19.07 Billion

As you can see. Google is small beans compared to Apple. To be a potential dow component, you've got to be reining in the revenue. Sales, beta and cash are the key metrices that determine whether a company is dow viable. And the key reason that revenue and net cash are central is because a company can always figure out a way to strengthen margins but its easy to produce $50 billion in sales. Cash is also key because it tells a story about the strength of the company's balance sheet. Apple does more in revenue, has a similar growth rate as google on net income, has more 50% more in net cash and is generally a larger company than Google. And both are high beta stocks. Google shouldn't be even mentioned at all.

May 28 01:02 PM

[modelportfo...:]

Those who post that Ford or some heavy duty manufacturer of widgets are the modern version of Luddites at the time of the Inudstrial Revolution---you know, the guys who threw objects into machines to stop them running efficiently. Take the time to check the meaning of "Industrial" and you will see why Google is definitely an industrial company.

The definition of "industrial" in Merriam Webster dictionary: 1. of or related to industry; 2. derived from human industry.

Consequently, definition of "industry" from same source: 1: diligence in an employment or pursuit ; especially : steady or habitual effort 2 a: systematic labor especially for some useful purpose or the creation of something of value b: a department or branch of a craft, art, business, or manufacture ; etc.

Google is an industrial company as it is engaged in human industry. Its industry is diligence and steady or habitual effort (eg, the best search algorithm, the best open source software, the best open source operating system, etc).

Google is the best candidate to replace companies that were in their prime last century. Let's face it, a revived GM or Chrysler will be laggards in an their industry. Google is the leader in its primary industry and its goal of organizing the worlds information through search, apps and mobile and generating revenues through ads linked to human industry (their creation of the search engine and the human effort of seeking information) makes it a prime example of the forward thinking needed by the committee of decision makers at Dow Jones who have the vision to embrace the economy of the future. By the way, the Committee at DJ would also be doing investors a favor by including Google because it would boost the Index value significantly from Day 1: the Dow Jones is a market cap weighted index so why not boost it by adding a company with $100 bn market cap (they have too many puny $15-20bn market cap companies in there already) that would get the Dow average back to its glory days quicker!

May 28 01:31 PM

[connorport:]

I have to agree that AAPL would be best suited as it is one of the many that is not overpriced and the strength of this comany goes all the way back to the pioneering of an industry in this country. Google to me seems a strong but lackluster choice due to its unbalanced portfolio at this point. AAPL seems to always be pulling a rabbit out of their hats and seems more destined to have longevity. My position is none in AAPL.


On May 28 01:02 PM Andy Zaky wrote:

> Ok. I cannot comprehend for the life of me why people think Google
> should be added to the dow rather than any of these other companies
> you've listed? In fact, none of those companies ought to be added
> because they're all high beta stocks. High beta stocks would keep
> volatility high in the index and thus drive away potential investors
> who see it as uncertainty in the market. But why Google in particular?
> Google is small beans compared to some of the other companies you
> mention. Apple is a far more viable candidate than Google as Apple's
> financial are far superior on nearly every front. See for yourself:
>
>
> Apple
> Cash: $28 Billion
> 2009 Expected Revenue: $35.4 Billion
> 2010 Expected Revenue: $40.9 Billion
>
> Google
> Cash: $17 Billion
> 2009 Expected Revenue: $16.79 Billion
> 2010 Expected Revenue: $19.07 Billion
>
> As you can see. Google is small beans compared to Apple. To be a
> potential dow component, you've got to be reining in the revenue.
> Sales, beta and cash are the key metrices that determine whether
> a company is dow viable. And the key reason that revenue and net
> cash are central is because a company can always figure out a way
> to strengthen margins but its easy to produce $50 billion in sales.
> Cash is also key because it tells a story about the strength of the
> company's balance sheet. Apple does more in revenue, has a similar
> growth rate as google on net income, has more 50% more in net cash
> and is generally a larger company than Google. And both are high
> beta stocks. Google shouldn't be even mentioned at all.

May 28 05:23 PM

[User 71311:]

kick Citi out and add either WFC, MA or V?
kick GM out and add csco, or DE?

May 28 11:34 PM

[KenC:]

Hmmm...no mention of Cisco?

May 29 11:18 AM

[LarryBlumen:]

I say get rid of the Dow altogether.

The Dow was invented for the Industrial Revolution. It is now the ground that the Information Revolution stands on.

When the Dow Informational Index is stood up, Google will be at the head of it.

May 29 12:43 PM

[Marco Hickey:]

What about Burlington Northern (BNI)?

May 30 03:58 PM