Caterpillar rules the Dow

The index gives more weight to pricey stocks like CAT, which critics say skews it unfairly.

By Kim Peterson Sep 27, 2010 1:41PM

Arrow © Cory Docken/JupiterimagesCaterpillar (CAT) is carrying the DowJones Industrial Average ($INDU) on its back, with such a heavy weight in the index that critics say the Dow has become ridiculous.

Consider that Caterpillar is responsible for a full 40% of the Dow's rise this year, The Associated Press reports. If the stock didn't exist, the Dow would be up only 2.5% this year instead of 4.1%.

Caterpillar has seen a marvelous rise this year, going from the $58 range to nearly $80. Sales at the equipment company are on fire, mainly because of international demand.

Caterpillar is trading at 20 times estimated earnings, compared with 13 times for other Dow companies, on average.

The Dow, for better or worse, gives pricey stocks more weight than cheap ones. So as Caterpillar shares have zoomed up this year, the stock has muscled its way into a greater weighting out of the 30 companies in the index. Other names, like Microsoft (MSFT), Bank of America(BAC) and Intel (INTC)? Small potatoes. (Microsoft publishes MSN Money.)

 

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"All this would be mere curiosity if so much of our mood and money didn't seem to hang on the Dow lately," writes the AP's Bernard Condon. "When the index is up, we're up. When it's down, we're down."

So do we pay an unnecessary amount of attention to the Dow, allowing the fortunes of one construction-equipment company too much influence on the financial world?

Yes, says Eddy Elfenbein of Crossing Wall Street. "Unless it's across 10,000, I haven't paid attention to the Dow in years," he wrote Sunday. "The S&P 500 is by far the better index."


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