In June of 2009, both Cisco Systems (Nasdaq: CSCO) and insurance firm The Travelers Cos. (NYSE: TRV) 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 today.
So which companies will be added? And how can investors profit 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 market value of more than $500 billion and a sales base soon to exceed $150 billion, Apple (Nasdaq: AAPL) has become far too large for the Dow analysts to ignore.
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: BAC) and Chevron (NYSE: CVX) were both added on February 19, 2008. Pfizer (NYSE: PFE) and Verizon (NYSE: VZ) 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 Dow.
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: JPM) and Bank of America (NYSE: BAC), then how about another insurer to replace Travelers?
With a market value exceeding $200 billion, might Berkshire Hathaway (NYSE: BRK-A, BRK-B) 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 Google (Nasdaq: GOOG)? This is arguably the ultimate TMT (technology, media, telecom) stock out there. And TMT is still one of America's greatest strengths.
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 economy, adding another name to this group makes little sense -- unless, of course, the Dow analysts want to swap Bank of America for Wells Fargo.
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 add Amazon.com (Nasdaq: AMZN) to add to the retail exposure that McDonald's (NYSE: MCD), Home Depot (NYSE: HD) and Wal-Mart (NYSE: WMT) 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 index 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 it.