Candidates to Replace GM, Citigroup in the Dow

Barron's Bob O'Brien notes that GM's pending bankruptcy, which is expected to be filed early next week, will force the company out of the Dow Jones Industrials index.

He reports on several companies that are being mentioned as possible replacements for GM and Citigroup (C). They include Wells Fargo (WFC), Goldman Sachs (GS), Google (GS), Visa (V) and Ross Stores (ROST), among others.

I posted this comment on O'Brien's blog:

GM is a large employer, makes consumer goods and is multinational. Heavily unionized. Apple (AAPL) seems the most comparable in terms of consumer goods even though its products are made in Asia. It’s also multinational, and it’s a software producer and retailer. Problem is its products are a bit faddish. Goldman would be ok as a bank, but it’s really an investment banker controlled by the feds until it gets out from under TARP and the FDIC. U.S. Bancorp (USB) would be a better choice. Nucor (NUE) is a leading steel producer and reflects the infrastructure, housing and industrial goods markets. Google (GOOG) is a media company, if that’s appropriate. It’s still a speculator’s toy. Amazon (AMZN) is the leading e-commerce company and a major retailer. AutoNation (AN) is an auto industry survivor and would be a good indicator of how that industry is doing and is expected to do. Monsanto (MON) is a good commodity play, and it’s high tech. Very sensitive to international markets, weather, government policies. Competes with DuPont, which is in the index.

Thoughts?

Disclosure: I own Monsanto and U.S. Bancorp.

Comments

[SteadfastMason:]

It doesn't matter who replaces GM on the DOW. The Dow, S&P, NASDC, etc...are volumes, highs and lows, are ALL fabricated and manipulated. At the present time, there is ABSOLUTELY no free market.

SteadfastMason

May 30 12:24 AM

[SteadfastMason:]

Caveat Emptor.

May 30 12:25 AM

[gary s p:]

Since 1997 the DOW-30 has seen massive changes in its make-up.
Almost all of the new additions were added at or near their all time high values: WMT, JNJ, HPQ, C, MSFT, INTC, HD, SBC,VR,PFE,AIG (there was a winner),CVX,BAC (another winner).
That is 13 of 30 added near their highs since 1997!
So, the only thing I like about a new addition is that it will be far off their all time highs! And, When you look at the damage done to the DOW-30 in the last 12 years, how did it ever even get to 14,000??
All of these stocks went down big time from their values when added.

My vote is for TGT ( the DOW needs another retailer ).

May 30 01:03 AM

[Fighting Yoda:]

I will vote for Cisco and Wells Fargo

May 30 01:16 AM

[Dave Wrixon:]

Describing Google as a speculator's toy really indicates just how badly you don't get it.

Trying to replace GM with like for like is pointless because the entire nature of the US economy is changing. Unfortunately, it is not all onward and upward, but it strikes me as bit lame belittling the few bastions of progress.

May 30 04:45 AM

[Timeline St...:]

Apple's products 'faddish'? My definition of 'faddish' would be GM, cranking out endless undesirable combinations of models that require heavy discounts and incentives to sell, all to meet the cost accountant's model of 100% factory capacity utilization.

Remember that Apple pioneered desktop computing and operating systems. It was the logical successor to the Silicon Valley garage ideal in the vein of Hewlett and Packard.

Apple had hard hard times, but unlike GM, revitalized itself by adapting its business model to reflect the changing way that customers consume media. In doing so, it created a second act that rivals any in business. And, this second act also has allowed Apple to return to its first act, which is computing and software for the masses.

And now it has completely revolutionized mobile computing.

Maybe you should ask your grandkids.

May 30 05:20 AM

[Donald Johnson:]

I've purchased more than 100 Macs for my business and myself since 1986. Apple is a consumer electronics company, and all consumer electronics, including PCs, have relatively short life cycles and are faddish, in my opinion. Apple's been especially good at anticipating and creating fads in very competitive markets.

At the moment, it's market share is growing in a troubled economy. I think it should be in the DOW because its revenues and profits depend on everyone from teens to presidential candidates, corporations and old folks like me.

As for GOOG, it's selling for 22 times cash flow, it's PE is a relatively high 30 given that its sales are growing only 6% a year, and it depends on advertising revenue. It's PEG is a relatively cheapt 1.07, according to data on YAHOO. The company doesn't provide guidance to investors, and its governance structure is rigged to deny voting rights to shareholders, which, I happen to think is wrong. At some point it will go the way of MSFT.


On May 30 05:20 AM Timeline Strategy Consulting wrote:

> Apple's products 'faddish'? My definition of 'faddish' would be GM,
> cranking out endless undesirable combinations of models that require
> heavy discounts and incentives to sell, all to meet the cost accountant's
> model of 100% factory capacity utilization.
>
> Remember that Apple pioneered desktop computing and operating systems.
> It was the logical successor to the Silicon Valley garage ideal in
> the vein of Hewlett and Packard.
>
> Apple had hard hard times, but unlike GM, revitalized itself by adapting
> its business model to reflect the changing way that customers consume
> media. In doing so, it created a second act that rivals any in business.
> And, this second act also has allowed Apple to return to its first
> act, which is computing and software for the masses.
>
> And now it has completely revolutionized mobile computing.
>
> Maybe you should ask your grandkids.

May 30 09:12 AM

[User 283977:]

The purpose of an Index is that it is representative of what you are trying to measure. As a consequence, there should be representatives from key sectors of the US economy.

If all they want to do is to make a substitution, I would replace GM with a steel company like Nucor (NUE) or US Steel (X). While I was at it I would also remove City (C) and replace it with Wells Fargo (WFC) or Bank of America (BAC).

As to the effect of the replacements on the Index valuation, remember it’s a 'scaled' average. So when replacements are made, they change the scaling.

If they really want the Dow Index to be representative, then they need to consult with a technical expert that is an expert in the design of representative Indexes.

May 30 10:43 AM

[gary s p:]

Well,
Adding Google or Apple will be a repeat of the same mistake that was made with INTC & MSFT. They were the high flyers at the time and it has been down hill since. If a tech name is needed (?) I would go for CSCO since it has already seen a major hair-cut.
But I look at the index and for a consumer driven country like ours, I believe the index needs a more retail exposure and that is why I believe it should add TGT or BBY or COST.

May 30 12:22 PM

[beentheredo...:]

Why not Ford Motor Company? F

May 30 12:48 PM

[spacesurfr:]

Why would they replace Citi they seem to be back on the right track......

May 30 01:02 PM

[Lavrentii:]

Apple IS in the retail consumer business. Look at their successful and growing Apple Store franchise, as well as the growing virtual store phenomenon- all on top of the other product development and sales businesses.

Apple + global retailer.


On May 30 12:22 PM gary s p wrote:

> Well,
> Adding Google or Apple will be a repeat of the same mistake that
> was made with INTC & MSFT. They were the high flyers at the
> time and it has been down hill since. If a tech name is needed (?)
> I would go for CSCO since it has already seen a major hair-cut.<br/>
> But I look at the index and for a consumer driven country like ours,
> I believe the index needs a more retail exposure and that is why
> I believe it should add TGT or BBY or COST.

May 30 01:58 PM

[Theta Guy:]

Donald, you defend your original post by saying Apple produces short life plan products which are therefore faddish. The "Pet Rock" was faddish....Macs, and IPods are consumables.

And I think it's incorrect to say they have "created fads in very competitive markets". They have created 'must-haves' by making beautifully designed products that the wanting consumer instantly craves and their competition immediately tries to emulate. But that is not creating a fad, that is creating a trend. The main difference from an investing standpoint is the latter is tradeable for the long term.

May 30 02:19 PM

[gary s p:]

My comment about Apple is that it is at a high and the down side is greater than any good growth. Apple was $14 a share before the IPOD and it is down to about $140 from $200+ but still up ten fold!

At a 25 PE and a product line that is aging ( in tech that comes fast) I see limited growth in the stock.

Yes they can be considered a retailer/tech play.

May 30 08:21 PM

[al s:]

To the comment that asked why replace Citi, C needs to be replaced because it is a dead bank walking. It "only failed" the stress test by $5 Bil. BECAUSE THE FED GAVE THEM CREDIT FOR THE $50 BIL. THEY ARE GOING TO CONVERT FROM PREFERRED TO COMMON !!!!
The reality is that C needed %55 Bil. under the test, far more trhan any other institution. From a competitive standpoint they are a weakened institution with BAC. Wells, JP Chase, eating thir lunch.
Remember they sold more than half of Smith Barney, Germany, The Japanese investment and broakerage businesses, a bunch of foreign credit card businesses, AND WHO KNOWS WHAT ELSE IN THE FUTURE !!!!!!
SO, WHAT DO YOU THINK WILL REPLACE THESE REVENUE STREAMS THAT NO LONGER EXIST ??????? In addition, they still have $1.5 T !!!!!! of special vehicles on the books that are CRAP !!!!
GEt them off the DOW and put on a real bank like WELLS !!!!1

May 30 10:24 PM

[HerrHansa:]

Why no mention of United Parcel Service (UPS)? They ship lots of things, and are a very important part of a consumer driven economy. An alternative would be Federal Express (FDX), though they are smaller than UPS.

May 30 11:35 PM

[BuffettMaster:]

I think the article was well-written and informative. A lot of the comments, not so much. For instance, there seems to be a natural gravitation on the part of commenters (and the public in general) that a company's success should be a factor in the process. American business is failing. If the index is to be representative, then a company's ability to FAIL should be the primary factor when considering index inclusion.

Therefore, I nominate New GM to replace old GM.

(With a big ole' chuckle.)

May 31 07:35 AM

[nickt:]

The stock is $3.70 that's why----they NEED to get rid of PANDIT---He's the one who said back in Oct-Nov that Citi didn't need TARP MONEY---He should be sued personally


On May 30 01:02 PM spacesurfr wrote:

> Why would they replace Citi they seem to be back on the right track......

May 31 05:33 PM

[Fighting Yoda:]

Het at least one of my picks CSCO came through


On May 30 01:16 AM Fighting Yoda wrote:

> I will vote for Cisco and Wells Fargo

Jun 01 12:16 PM

[gary s p:]

I too, suggested CSCO for a tech stock if a tech stock was needed.
It is the first time a tech was added that wasn't very over valued ( like MSFT, INTC were in 1999).

I'm not sure the DOW-30 needed another tech stock, but CSCO is much better than AAPL & GOOG.

The Travelers choice is funny since my wife got some when it was spun-off from Citi, the same C that it replaced, she sold it a long time ago. I sold my C at the opening today ( it was a nice ride from the penny stock level).

All in all I give the DOW-30 two thumbs-up with these picks.


On Jun 01 12:16 PM Fighting Yoda wrote:

> Het at least one of my picks CSCO came through

Jun 01 10:12 PM

[Donald Johnson:]

Well,

AAPL, NUE, USB and MON didn't make it. It was fun to speculate about which companies would be picked. Thanks for all the comments.

Jun 02 08:36 AM