This Stock Could Disappear from the Dow
The Dow Jones Industrial Average isn’t considered the most accurate reflection of the market’s overall performance, but few can argue against the fact that it is the most widely recognized and highly symbolic representation of the state of American stocks.
Outside of the large-cap, old-line American companies among the Dow Jones Industrials, there are more than 10,000 publicly traded stocks from which investors can pick and choose. But Dow component companies carry the panache of selling a “blue-chip” stock investors might regard as part of an elite grouping worthy of their money.
Since Charles Dow introduced his 12-stock industrial index in 1896 to accompany The Wall Street Journal’s transportation index, about four-dozen adjustments have been made, including the expansion to a roster of 30 in 1928. Most of the original dozen have gone the way of the buggy whip and are out of business, or morphed into another direction in the past 114 years. One familiar name remains: General Electric (NYSE: GE) — however, the conglomerate was yanked twice around the beginning of the 20th century, only to return.
It has been more than a year since the Dow was rejiggered, when Cisco Systems (Nasdaq: CSCO) and Travelers Cos. (NYSE: TRV) replaced the bankrupt old General Motors and Citigroup (NYSE: C). There’s no set pattern for reviews of the composition of this price-weighted index, but maybe it’s time for the committee members appointed in March to consider jettisoning the weakest links and bringing in some fresh blood.
In the meantime, it’s worthwhile to speculate about which lightweights among the heavyweights could be jettisoned in the next rebalancing. Such a focus could provide clues as to which stocks to avoid — or short — and which to hold for the long haul.
Almost from its launch, the Dow has contained stocks of companies not purely “industry” in a traditional smokestack sense. So which stocks are most vulnerable to be dethroned from this small subset of the U.S. stock market?
What does the stock of American Express (NYSE: AXP) offer to investors that a Visa (NYSE: V) or MasterCard (NYSE: MA) doesn’t? As IBM (NYSE: IBM) transitions from selling and servicing big iron to going big on business services, and Microsoft (Nasdaq: MSFT) dawdles along in the slow lane of technology’s innovation highway, is it time to substitute a Nasdaq-traded Apple (Nasdaq: AAPL) or Google (Nasdaq: GOOG)?
Although GM is gone, should the American auto industry be ignored, considering the renaissance of Ford Motor (NYSE: F)? Or, when the new GM pulls the trigger on its expected IPO, will it deserve to be called a blue-chip once again?
If the keepers of the Dow do decide to make changes, there is one stock I think is especially in danger of being tossed.
The most vulnerable stock on the Dow
Perhaps the most vulnerable member is Alcoa (NYSE: AA). Shares peaked just north of $40 back in 1999, there hasn’t been a stock split since 2000, and it hasn’t approached that $40 level since 2007. Admittedly, second-quarter results, which included a $136 million profit on stronger-than-anticipated +22% revenue growth, gave rise to a more bullish outlook, especially when it comes to predictions of growth in global demand for its metals. Still, 10 of First Call/Thomson Financial’s 19 analysts have the stock rated a “hold” or lower, with one saying it’s time to sell.
Recently, Alcoa announced a refinancing move under which it would buy back $750 million of its debt maturing over the next three years, along with the offering of $1 billion in new 10-year notes.
Alcoa, part of the Dow since 1959, is one of those old standbys, a favorite for retirees to hold on to and pass to the kids. But lately, the stagnant stock price since the 2008 meltdown and a measly dividend of 12 cents a year combined with fiscal 2010 earnings estimated at less than 50 cents a share should serve as a wake-up call. Aggressive investors might find better places to park their cash as stocks continue to fight their way out of the doldrums.
A company such as Alcoa is highly dependent upon the economic recovery, not just in the U.S., but worldwide. So far, with the recent gloomy economic forecasts, it could take some time before investors again take a shine to Alcoa’s shares.
Action to Take –> If there’s a weak link in the Dow’s representation of the overall stock market, Alcoa comes closest. It’s an old-line manufacturer struggling to recapture the spirit of innovation for which it was once known. Erase this one and pencil in other names such as Apple or Google, which might better portray what is American “industry” of the 21st century.
Alcoa’s short interest, according to second-quarter financials, is 77.3 million shares, up from 74 million the month before. There are just over a billion shares outstanding, giving the stock a short interest ratio of 7.6%. Not many analysts are showing they’re bullish about the company, and as bearish sentiment grips onto the stock, shorting Alcoa is an option.