The Dow Jones Industrial Average (DJIA) was created over 100 years ago in 1896 by Charles Dow, founder of Dow Jones, with the objective of creating a benchmark metric for the stock market’s performance over a period of time. While the first 12 Dow components were indeed industrial companies as the name indicates, today the Dow 30 has the objective of mirroring the U.S. economy. Interestingly enough General Electric (GE) has remained in the Dow since its inception but there is typically turnover to match the current economic drivers.
With the recent turmoil and uncertainty at Hewlett Packard (HPQ) I believe it is time to start speculating as to whether its near 15-year run in the Dow 30 could be coming to an end. After Friday’s 20% decline HP is now down over 40% for the year versus a decline of 10% for the S&P 500. HP’s removal would hardly be an unprecedented move as there is a component change nearly once every two years on average, most recently with Bank of America (BAC) and Chevron (CVX) replacing Altria (MO) and Honeywell (HON). As an aside, I bet Dow Jones really wishes they would have kept Altria over Bank of America.
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Altria was removed from the Dow 30 because it spun off Kraft (KFT) so it is not that far-fetched to speculate that HP could be removed after selling over its personal computer business that represents approximately one-third of the business. I think it is more a question of when rather than if HP will be replaced. The question turns to what company will replace HP and I am of the opinion that there is only one logical conclusion.
People were laughing at the time when Steve Jobs boasted that we are entering a “post-PC world” but HP shareholders are not laughing now. It is difficult to argue that Apple (AAPL) is not more important to the U.S. economy than HP is. Furthermore, HP seems to be following in IBM’s (IBM) footsteps and transitioning to the technology service industry, so keeping both in the Dow would be repetitive for tech stocks.
Unlike the S&P 500, the Dow is price weighted, therefore, Apple would significantly overshadow even $157 per share IBM. In contrast, HP is currently only the 24th most influential Dow component. (Curious about the least influential? Surprisingly it is Bank of America with its sub $7 price per share.) If Apple was to be selected to join the Dow I would expect at least a three-for-one stock split to bring its influence more in-line with that of IBM.
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So what does this mean for investors? If you own HP the bad news just keeps piling on as mutual funds and ETFs - such as DIA - that track the Dow 30 will dump shares of HP in favor of Apple. Given that Apple would be the most influential stock in the Dow there could be significant demand, regardless of the economic climate. This would be the polar opposite of the forced selling in Apple when its weighting was reduced in the Nasdaq 100 (QQQ) and is a great sign for investors.
In closing, I'm merely presenting the logical case that this could happen, not that it will. I would be quite surprised if Apple does enter the exclusive Dow 30. But with such a strong bullish case already existing for Apple, here is yet another potential catalyst that could rocket the stock higher.
Disclosure: Author is long AAPL, CVX, MO, and KFT, plans to write AAPL August 26 370 Calls.