Will
Apple (Nasdaq:
AAPL
)
soon join the Dow Jones Industrial Average? A rising chorus of
pundits suggests so. A few other firms may also be added, since the
analysts who chose the
index
's components rarely make just one move. But to make way for any
new members, some existing Dow members may soon get their walking
papers.
The
economy
changes over the years, and this is often reflected in this index.
Since its founding in 1896, companies like the U.S. Leather Co.,
the Distilling & Cattle Feeding Co. and the American
Cotton Oil Co. were once Dow components, but don't even exist as
standalone companies any more. In their place are vaunted names
like
Microsoft (Nasdaq:
MSFT
)
,
McDonald's (NYSE:
MCD
)
, and
Coca-Cola (NYSE:
KO
)
among others.
So why should you care which firms might be leaving the index?
Because leaving the Dow means funds that are required to hold Dow
components will need to dump their
shares
. This means that if you own any of these possible rejects, then
you should be prepared for the stock to take a hit.
The Dow analysts use various criteria to determine what should
be included (such as company size, importance to the American
economy, etc.). But if the Dow analysts judged companies strictly
by
market
size, then some obvious candidates would be likely ejected.
These seven Dow components have the smallest
market value
...
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Although the U.S. industrial base has eroded in the past few
decades,
Boeing (NYSE:
BA
)
,
Caterpillar (NYSE:
CAT
)
and
3M (
MMM
)
are clear success stories -- especially in terms of exports. Yet
it's the three smallest firms in this table that should feel
vulnerable.
Alcoa (NYSE:
AA
)
, for example, is a fine company. I still think this stock is quite
undervalued in the context of mid- to peak-cycle
earnings
, but even if shares doubled from here, then its market value would
still be below $20 billion.
Travelers (NYSE:
TRV
)
is a trickier choice. This stock was only added three years ago,
and the Dow analysts rarely drop a company that was only recently
invited to join the index. Travelers was added to provide more
exposure to financial services at a time when big banks like
Citigroup (NYSE:
C
)
were looking like a bad representative of the financial services
sector. Travelers' market value is just one-third that of
Citigroup.
The third-smallest company in the Dow? That would be
Hewlett-Packard (NYSE:
HPQ
)
. Quite suddenly, being the world's largest makers of PCs is no
longer something to boast about. In just a few short years,
smartphones and tablet computers have completely upended this
industry. The fact that
CEO
Meg Whitman is overseeing the layoffs of thousands of employees
makes you wonder what kind of future this company has. Besides,
Intel (Nasdaq:
INTC
)
,
IBM (NYSE:
IBM
)
and
Cisco Systems (Nasdaq:
CSCO
)
give the index ample exposure to high-tech, even before the
inclusion of Apple or others.
Lastly,
Kraft (NYSE:
KFT
)
may soon get the boost as the packaged foods maker aims to slice
itself in two on Oct. 1, and each resulting half may be too small
for the Dow.
Risks to Consider:
Betting on Dow exclusion is no sure thing. Analysts have
long-expressed concerns that Alcoa should no longer be in the Dow,
but there it stays. So predicting its exit from the Dow has been a
losing bet thus far.
Action to Take -->
Alcoa and Hewlett-Packard are already so inexpensive that it's hard
to see much more downside. Travelers, on the other hand, is trading
near its
52-week high
, and looks more vulnerable. For that matter,
Du Pont (NYSE:
DD
)
and
United Technologies (NYSE:
UTX
)
shouldn't rest easy, either. These companies are no longer the
industry dominators they once were -- a key consideration for the
Dow Jones analysts. And as noted earlier, Kraft may get the
heave-ho when its splits itself in two on October 1.
As noted earlier, exclusion from the Dow adds short-term selling
pressure from index funds. So you may want to cut your exposure to
these possible Dow rejects.
[Editor's note:
Which stocks are likely to be added to the Dow? And should you
consider buying them before they make it on the index?
Click here to find out
...
]
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of MSFT, KO, CSCO in one or more if its "real money"
portfolios.