In June of 2009, both
Cisco Systems (Nasdaq:
and insurance firm
The Travelers Cos. (NYSE:
received an invitation to a very exclusive club. Only 30 companies
get to be members of this club, and it's one of the crowning
achievements for a company to be asked to join.
I'm talking, of course, about these companies being invited to
become members of the Dow Jones Industrial Average.
But in this article
, I mentioned that there are a few members of this exclusive club
that are likely to get the boot in favor of other companies that
are larger, growing faster, and perhaps generally considered to be
better representatives of where "blue chip corporate America" lies
So which companies will be added? And how can investors
from such a move?
I've got a few ideas...
Time for a change?
In recent weeks, there has been a growing buzz that fast-growing
technology company (which sells many products that begin with the
letter "i") is ready to join the Dow. Such a move makes ample
sense. With a
of more than $500 billion and a sales base soon to exceed $150
has become far too large for the Dow analysts to ignore.
Who gets the invite?
If Apple is not the next company to be added to the Dow, it would
cause quite a ruckus. And frankly an Apple-for-
makes ample sense.
Yet the Dow analysts rarely make just one move: Cisco and Travelers
were added on the same day (June 8, 2009).
Bank of America (NYSE:
were both added on February 19, 2008.
were both added on April 8, 2004. You get the idea.
So if more than one company is shown the door, then which
companies might get an invite? Well, simply based on market value,
these are the five largest U.S. companies that are not in the
In my look at which firms may get dropped from the Dow, I
suggested insurance firm Travelers might be vulnerable.
What company might take its place? Assuming that the bank stocks
are already sufficiently represented by
JP Morgan Chase (NYSE:
Bank of America (NYSE:
, then how about another insurer to replace Travelers?
With a market value exceeding $200 billion, might
Berkshire Hathaway (NYSE:
be a suitable replacement? To be sure, Warren Buffett's investment
vehicle owns many other businesses besides insurers, but its
insurance businesses are notably larger than Travelers'.
Well, besides Apple and Berkshire Hathaway, what about
? This is arguably the ultimate TMT (technology, media, telecom)
stock out there. And TMT is still one of America's greatest
Serious consideration must also be given to
Wells Fargo (NYSE:
, each of which has a market value that would make them among the
10 largest stocks in the Dow.
Yet each one has a strike against it.
Oracle is arguably the largest software company in the world --
outside of the United States. Yet it's hard to argue for Oracle
when Apple and Google are ahead in the pecking order. If both of
those firms are added, then it would be quite unlikely that the Dow
analysts seek to add yet another high-tech name right now.
Financial stocks are already amply represented by both JP Morgan
Chase and BofA, and when you consider that the financial services
industry has shrunk in size these past few years and is now a
smaller part of the total
, adding another name to this group makes little sense -- unless,
of course, the Dow analysts want to swap Bank of America for Wells
Size or relevance?
Of course, with their choice of Travelers a few years ago, the Dow
analysts make it clear that it's not just about size but also about
sector exposure that merits inclusion. So might it make sense to
to add to the retail exposure that
Home Depot (NYSE:
bring? Amazon's strategies imply significant growth in the years
ahead, and the Dow likes to latch on to solid growth stories.
Risks to Consider:
Betting on Dow inclusion is risky. Outside of the obvious
choice of Apple, these other candidates have only the possibility
-- not probability of getting added.
Action to Take -->
Which companies will get the invite? We may soon find out.
As noted in my earlier article, inclusion in the Dow adds
short-term buying support from
funds. Right now, Apple, Google and Amazon.com all appear to be the
most logical candidates for Dow inclusion, though Wells Fargo and
Berkshire Hathaway also have horses in this race. If you're already
interested in buying these stocks, or already own them, then
inclusion in the Dow is just one more reason to feel good about
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of CSCO, GOOG in one or more if its "real money"