According to the DJIA Fact Sheet, the stated objective of the index is:
To represent large and well-known U.S. companies. Covers all industries with the exception of Transportation and Utilities.
And the Key Features of the Index are as follows:
- The index is maintained by the Averages Committee.
- Components are added and deleted on an as-needed basis. For the sake of continuity, such changes are rare, and typically occur following corporate acquisitions or other significant changes in a component company's core business. When one component is replaced, all of them are reviewed.
- While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process.
Dow Check List For Apple (other than price)
Excellent reputation... CHECK
Demonstrates sustained growth... CHECK
Of interest to a large number of investors... CHECK
In addition, the DJIA is currently underweight the Technology sector (Tech sector currently represents only 11% of DJIA vs. 19% of S&P 500).
Apple is the most valuable company in the world (by market cap) and it certainly appears as if Apple is a shoo-in now!
Timing of the Apple Swap?
Now that we have established that Apple is a shoo-in to be added to the DJIA, the million dollar question is... When?
Given that the stock has run up almost 25% since the stock split was announced (see chart above), our conspiracy theory is that Index officials are potentially waiting for the general market to pullback before they make the swap.
Our reasoning is simple (and a little unorthodox)... Apple will help the Dow recover more quickly post-correction.
If you compare Apple to the stocks that the company will potentially replace [DuPont (NYSE:DD), United Technologies (NYSE:UTX), Goldman Sachs (NYSE:GS)], which one would you rather "buy the dip" on? Apple, of course.
Not only will the company recover faster than the stocks above, Apple shares will surge on the news of being added to the Index (probably a surge unlike anything we have seen with past swaps) and shares will get additional institutional support as portfolio managers shift to the appropriate allocation (based on post swap weightings).
While we believe that a healthy correction is imminent, there is certainly a chance that the long-awaited general market pullback doesn't come this year. In addition, we believe that there is still more room for Apple to run in the short term: Apple Will Probably Break Above $100 This Week.
Regardless of whether or not Index officials are really waiting for a "buy the dip" moment, we believe that officials will "bite the bullet" eventually and Apple will be part of the exclusive Dow Jones Industrial Average club by year end.
What do you think? Feel free to comment below.
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.