Investors in the move Apple Computer (NASDAQ:AAPL) have been waiting a long time to see their company become part of the Dow Jones industrial average, and finally that day has come. The interesting part is that the addition of Apple in the Dow Jones industrial average may actually have negative influences on the stock.
In my instablog I have already identified fair valuation for Apple based on EPS growth estimates, the PE ratio, and the relative peg ratios that exist today and that would exist a year and two years from now if analysts are right about their estimates, and everything considered the valuation that is currently placed on Apple is far better than what is placed on AT&T (NYSE:T), so the valuation of the Dow Jones industrial average will improve slightly, but overall the Dow Jones industrial average is not attractive on a valuation basis whatsoever.
The Dow Jones industrial average, with all stocks combined, has meager growth and it is expected to maintain that path for the next couple of years even with Apple. With a PE multiple that is relatively high and growth that is expected to be subdued, if not worse given the currency fluctuations, investors in the Dow Jones industrial average might eventually be concerned with the valuation of the Dow Jones industrial average and selling pressure may hit the Dow accordingly. When selling pressure hits the Dow, it has negative influences on all DJIA components.
If that happens investors in Apple are going to see selling pressure hit their stock and that selling pressure might actually surprise them. The addition of Apple to the Dow Jones industrial average improves the valuation metrics for the Dow Jones industrial average slightly, but not significantly, valuation for the Dow Jones industrial average is still a major concern, and if investors ever begin to believe that valuation matters again selling pressure is likely to come.
Obviously, this works both ways, and if investors perceive value, or if money flows simply come into the Dow Jones industrial average regardless of value, shares of Apple will naturally benefit because they are now part of the Dow Jones industrial average.
That boils down to a simple question. Is the Dow Jones industrial average fairly valued at these levels? My answer is that it looks extremely expensive, the dividend payout ratio for the Dow Jones industrial average is declining with the addition of Apple and that is not comforting to investors in the Dow, and I firmly believe that valuation concerns are going to haunt the Dow Jones industrial average and cause pressure all year long with a lingering risk that any negative news event could hit the market harder than anyone expects because stimulus is over and the FOMC is actually starting to consider raising interest rates.
They are doing this in the face of what my macroeconomic work considers to be the third major down period in US history, and economic condition predicated on natural growth rates, but one that has been masked by the fabricated dollars infused into the system by the FOMC.
If my observations about the market are right and selling pressure comes into the market as a whole I believe that will translate into added pressure on shares of Apple, pressure that would not otherwise have been there if Apple was not part of the Dow Jones industrial average like it is now.
In my opinion, Apple may have been better off not being part of the Dow Jones industrial average.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: By Thomas H. Kee for Stock Traders Daily and neither receives compensation from the publicly traded companies listed herein for writing this article.