By Paul Shea
The Dow Jones Industrial Average (DJIA) is performing well so far this year, with new highs a regular occurrence. The index is, despite a big shake-up last year, still underperforming the S&P 500 (NYSEARCA:SPY) and that's a cause for concern for those following the market as a measure of market performance. As Facebook, Inc. (NASDAQ:FB) becomes a big part of the US stock market, the index may be forced to consider adding a web-based company to its index at long last.
Facebook Inc has a market cap of $195 billion today, similar to that of International Business Machines Corp. (NYSE:IBM), and above that of stalwart blue chips like The Coca-Cola Company (NYSE:KO), AT&T Inc. (NYSE:T) and Bank of America Corp (NYSE:BAC). Like it or not, the company is one of the most valuable in America, and including it in the Dow Jones may be a step in the right direction for the index.
Dow Jones shows problems with the web
The Dow Jones Industrial Average is not completely adverse to indexing technology companies, but it tends to aim for a certain type. Intel Corporation (NASDAQ:INTC) and Microsoft Corporation (NASDAQ:MSFT) has sat on the index since they went mega-cap in 1999 and International Business Machines Corp has been on the index since 1932. There has been only one technology addition since the dotcom bubble, Cisco Systems, Inc. (NASDAQ:CSCO) in 2009, and given the constant talk of dotcom 2.0 demonstrates why.
Web companies have only really arrived onto the scene in the last ten years with Google, Inc. (GOOG, GOOGL) leading the way. That company's shares are far too highly priced to enter into the Dow Jones Industrial Average, but Facebook Inc sits at a level that seems about right. When Apple, Inc. (NASDAQ:AAPL) repriced its shares earlier this year, a hope to be added to the DJIA was floated as a possible reason for the split.
Dow Jones wrestles with underperformance, Facebook may be solution
Because of its lack of exposure to the fast moving tech market, the Dow Jones Industrial Average is lagging behind the returns of the S&P 500, with the doubling of the DJIA in the last five years, significantly less than the 125% rise in the S&P 500. Companies like Apple Inc. have shown that tech is more than just fast talking and stock-splits, they're the heart of the consumer products business, and retail, and advertising. Facebook Inc is the second biggest player in digital ads, and it may deserve representation.
Not wanting to create more exposure to the technology market may be a wise decision by those in charge of the DJIA, but the current exposure could be reoriented. Given the problems that IBM weighs on the index, and the speculative nature of its business plan going forward, it may be time to replace it with one or two stocks that better represent the modern world Facebook Inc, given its large market cap and burgeoning business, might be a good start.
The index makers clearly don't want to add another 1999 Microsoft to its ranks, and Facebook Inc is trading at 80 times last year's earnings. So it may take a couple of years to get used to the idea, but the digital ad market is exploding and it may need to be represented sooner rather than later.