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 InvestorPlace May 19, 2011 9:03AM

By Jeff Reeves, Editor, InvestorPlace.com

 

jeff reevesNext 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?


As we approach the Dow's 115th birthday, allow me to offer one humble suggestion on how to improve the index: Kick out recent addition Cisco (CSCO) and add consumer tech powerhouse Apple (AAPL).


Why drop Cisco?

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.

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.)


Why add Apple?

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.

0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.