Dow Ignores Top Tech Stocks at Its Own Peril

Recently I looked at how the new Dow Jones Industrial Average looks from a sector perspective. Now let's look at market caps.

I know that the Dow is not a market-cap index. It doesn't even try to be. Still, it's interesting to see how and where the Dow deviates from a traditional market-cap-weighted approach. To do that, I took all the stocks domiciled in the U.S. and ranked them by market capitalization. Here's the top 30; Dow components are bolded.

Company	Market Cap ($US B)	Company	Market Cap ($US B)
Exxon Mobil	$460 Bil	Cisco Systems Inc	$146
General Electric	$354	Coca-Cola Co	$138
Microsoft Corp	$270	Citigroup	$132
AT & T Ord	$234	ConocoPhillips	$126
Berkshire Hathaway	$223	Intel	$124
Procter & Gamble	$206	AIG	$115
Wal-Mart Stores	$203	Pepsico	$115
Bank of America	$192	Apple	$114
Johnson & Johnson	$181	Hewlett Packard	$113
Chevron	$173	VZ	$111
Google	$167	MRK	$104
Pfizer	$155	Schlumberger	$102
Altria Group	$153	Oracle	$101
IBM	$149	Wells Fargo	$100
JPMorgan Chase	$147	Publix Super Markets	$93

Interestingly, Dow Jones ignores 10 of the 30 largest companies in the U.S. by market cap. Berkshire Hathaway (BRK.A) jumps out as the largest U.S. company not to make the grade. With a market cap of $223 billion, revenues of $116 billion and over 200,000 employees, it's hard to imagine why. (It's a conglomerate? So? GE (GE) is best considered a conglomerate, and it passes the test.)

What really jumps out at me about this list, however, is the bias against large-cap technology. Google (GOOG) ranks as the 11^th largest company, Cisco (CSCO) as the 16^th, Apple (AAPL) as the 23^rd and Oracle (ORCL) as the 27^th ... and none make the grade.

Cisco seems like the missing link. The company has annual revenues of $37 billion and its hardware allows the Internet to exist. Why include two landline telecom companies (Verizon (VZ) and AT&T (T)) or three computer manufacturers (H-P (HPQ), IBM (IBM) and Intel (INTC)) and not one company tied to the Internet? Sure, I remember the Internet bubble. But how well would the American economy run today without the Internet, email, etc.?

Google's another issue altogether, although I'm sure there are plenty of people stumping for its inclusion, too.

What could leave the Dow to make room? Well, the five smallest companies in the Dow are Home Depot (HD) ($48 billion), Caterpillar (CAT) ($45 billion), Dupont (DD) ($42 billion), Alcoa (AA) ($29 billion) and GM (GM) ($15 billion). GM's market cap is artificially depressed, of course: the company has over $20 billion in debt, which counts directly against the market capitalization.

The real odd man out, if you ask me, is the sixth-smallest company: American Express (AXP), with a market cap of $54 billion. Does anyone really think it's still one of the 30 most important companies in the U.S.? Here's one interesting fact: I checked the rank of Dow components in Rob Arnott's fundamentally weighted FTSE RAFI 1000, and American Express was the lowest-ranked Dow component at #84.

The highest-ranked company not included in the Dow? Kraft Foods (KFT), which takes the #3 slot in the FTSE RAFI index behind Exxon (XOM) and GE.

Interesting...

Written by Matthew Hougan

Comments

[James Cullen]

You could never add Berkshire to the DJIA and keep it price-weighted...