How to fix the Dow: Drop Cisco, add Apple
CSCO is a recent addition that has underperformed, and the index should focus more on consumer tech than corporate tech.
By Jeff Reeves, Editor, InvestorPlace.com
Next Thursday marks 115th birthday of the much-followed -- and much maligned -- Dow Jones Industrial Average. Charles Dow created the benchmark on May 26, 1896, at a reading of 40 points, representing the dollar average of 12 stocks from leading U.S. industries.
There have been a host of changes to the index over the years, with the lineup of component stocks growing to 30 and involving 48 different formulations since its inception. Of course, some of the most recent changes include booting out victims of the financial crisis: General Motors (GM), American International Group (AIG) and Citigroup (C).
But why wait until a company goes bankrupt or gets bailed out to rejigger the index? If the Dow is so widely cited by the media and economic analysts, shouldn't it be a precise gauge of the stock market and the American economy as a whole and not just a nostalgic list of old giants that have seen better days?
I’m not just projecting frustration at Cisco because of this dead tech stock’s performance over the past few years. But Cisco, unfortunately, exhibits one of the worst characteristics about the most recent additions to the Dow -- namely, the fact that joining the index almost always results in pain for newcomers.
- Related Article: Data shows joining the Dow is the kiss of death
Why should we suffer an underperforming tech stock when there are plenty of older, more attractive alternatives already part of the index? Hewlett-Packard (HPQ), Microsoft (MSFT) and IBM (IBM) seem to have corporate technology well covered. We don’t need four such companies, and as the new kid on the block, Cisco is the one that should be shown the door. (Microsoft owns and publishes MSN Money.)
While all these tech stocks crowd the corporate market, in the current makeup of the Dow, there are no true consumer technology plays. so why not add the 900-pound gorilla of consumer tech? The closest would be Intel (INTC), but the semiconductor giant serves so many chip markets it isn’t a pure play on consumer tech. What’s more, in addition to adding consumer technology to the footprint of the Dow, adding Apple would toss in one of the largest corporations in the world -- a move that is long overdue according to many market watchers.
The downside, of course, is that since the Dow is a price-weighted index rather than a market-cap-weighted one, Apple would instantly have the most pull at $350 a share and could really move the index. (Read a related column from Jon Markman about how adding Apple would boost the Dow). But considering Apple’s strong upward momentum, many folks may not complain too much about that influence in the near future.
Read my complete take on this flawed index and four more changes to the list of Dow components on InvestorPlace.com.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.
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