Dow Ignores Top Tech Stocks at Its Own Peril

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Includes: AAPL, AXP, BRK.A, CSCO, GOOG, ORCL
by: IndexUniverse

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 (NYSE: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 (NYSE: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 (NASDAQ:GOOG) ranks as the 11th largest company, Cisco (NASDAQ:CSCO) as the 16th, Apple (NASDAQ:AAPL) as the 23rd and Oracle (NYSE:ORCL) as the 27th ... 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 (NYSE:VZ) and AT&T (NYSE:T)) or three computer manufacturers (H-P (NYSE:HPQ), IBM (NYSE:IBM) and Intel (NASDAQ: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 (NYSE:HD) ($48 billion), Caterpillar (NYSE:CAT) ($45 billion), Dupont (NYSE:DD) ($42 billion), Alcoa (NYSE:AA) ($29 billion) and GM (NYSE: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 (NYSE: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 (NYSE:XOM) and GE.

Interesting...

Written by Matthew Hougan

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