The New Dow Jones Industrials: Good, Bad, or Sleight of Hand?
|Written by GSCR Staff|
|Tuesday, 10 September 2013 22:19|
The big news on Wall Street yesterday was the subtraction and addition in the Dow Jones (30) Industrials. This is the first change in the index since 2004 and marks the exit of Alcoa (NYSE – AA), a part of the Dow for over 50 years.
The change will take place Monday morning September 23rd as Goldman Sachs (NYSE – GS), Nike (NYSE – NKE), and Visa (NYSE – V) replace Alcoa, Bank of America (NYSE – BAC), and Hewlett-Packard (NYSE – HPQ).
This topic is right on cue from this week’s Goldman Guide as one of our points centered on stock indices and weighting. The Dow Jones is a priced=based index and from strictly that perspective it is easy to see why these stocks were replaced. Here is a brief summary from a quick glance intraday yesterday with rounded percentage and dollar figures.
GS: $165, Up + 21% YTD, Financials
NKE: $66, Up +26% YTD, Consumer Goods
V: $184, Up +15% YTD, Financials
BAC: $15, Up +20% YTD, Financials
AA: $8, Down -10% YTD, Materials
HPQ: $22, Up +48% YTD, Technology
Here is some quick math. The “IN” stocks equal $415 total, and the “OUT” stocks equal $45 total. This is almost a 10x multiple. As far as average YTD returns are considered, it is pretty much a wash with IN equal to about 20% and OUT equal to about 19%, with HPQ skyrocketing in 2013 and AA on the slide in a bull market.
The sector changes are somewhat telling. GS, a high-end brokerage and V combine to replace BAC in my opinion. A direct sign of where the average consumer is related to finances. AAPL replaced HPQ a long time ago! Finally, NKE replacing AA can be yet another indication of the declining manufacturing base in the US being replaced by a consumption driven trade-deficit economy and growth/brand name migration.
For the conspiracy theorists out there, I offer this nugget. Have you ever considered how many products are sold that are passive index ETF or mutual funds tied to the Dow Index? I am not saying this is what occurred here, but clearly there is a lot of money to be made in retail investing, and replacing has-beens with hipsters from a public perception standpoint can only aid in the sales pitch. Moreover, this change will leave an indelible mark on P/E valuations as they will be higher now than they have been previously which may skew one’s perception of undervalued or overvalued.
Finally, David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices stated, “There’s no intention to pick winner”. Along those lines an outstanding article was written in MarketWatch yesterday with the link below.
Here is a quick glance at a composite analyst score (the higher the better) and forward 12-month P/E (the lower the better) from a few sites.
GS: Score = 2.7, Forward P/E = 11
NKE: Score = 2.3, Forward P/E = 19
V: Score = 2.1, Forward P/E = 21
BAC: Score = 2.7, Forward P/E = 11
AA: Score = 3.0, Forward P/E = 16
HPQ: Score = 2.8, Forward P/E = 6
Getting out of the DJ Index just might be the ticket.
Have a great day!
Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.
This Market Monitor blog was prepared for informational purposes only. Goldman Small Cap Research, (a division of Two Triangle Consulting Group, LLC) produces research via two formats: Goldman Select Research, which typically highlights small cap companies, and Goldman Opportunity Research, which features micro cap companies in a sponsored research format. Thus, the Select product reflects the Firm’s internally generated stock ideas while the Opportunity product reflects sponsored research reports.
Goldman Small Cap Research is not affiliated in any way with Goldman Sachs & Co.
It is important to note that while we may track performance separately, we utilize the same coverage criteria in determining coverage of all stocks in both research formats. Please view the company’s individual disclosures for each engagement, which can be found in each company-specific report. All information contained in this blog, newsletter and in our reports were provided by the Companies or generated from our own due diligence. Our analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests, retain editorial control, and ensure independence. Analysts are compensated on a per report basis and not on the basis of his/her recommendations.
The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Goldman Small Cap Research did not make an independent investigation or inquiry as to the accuracy of any information provided by the Company, or other firms. Goldman Small Cap Research relied solely upon information provided by the Company through its filings, press releases, presentations, and through its own internal due diligence for accuracy and completeness. Such information and the opinions expressed are subject to change without notice. A Goldman Small Cap Research blog, report, note, or newsletter is not intended as an offering, recommendation, or a solicitation of an offer to buy or sell the securities mentioned or discussed.
This blog does not take into account the investment objectives, financial situation, or particular needs of any particular person. This blog does not provide all information material to an investor’s decision about whether or not to make any investment. Any discussion of risks in this presentation is not a disclosure of all risks or a complete discussion of the risks mentioned. Neither Goldman Small Cap Research, nor its parent, is registered as a securities broker-dealer or an investment adviser with FINRA or with any state securities regulatory authority.
ALL INFORMATION IN THIS BLOG, REPORT OR NEWSLETTER IS PROVIDED “AS IS” WITHOUT WARRANTIES, EXPRESSED OR IMPLIED, OR REPRESENTATIONS OF ANY KIND. TO THE FULLEST EXTENT PERMISSIBLE UNDER APPLICABLE LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE FOR THE QUALITY, ACCURACY, COMPLETENESS, RELIABILITY OR TIMELINESS OF THIS INFORMATION, OR FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES THAT MAY ARISE OUT OF THE USE OF THIS INFORMATION BY YOU OR ANYONE ELSE (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS, LOSS OF OPPORTUNITIES, TRADING LOSSES, AND DAMAGES THAT MAY RESULT FROM ANY INACCURACY OR INCOMPLETENESS OF THIS INFORMATION). TO THE FULLEST EXTENT PERMITTED BY LAW, TWO TRIANGLE CONSULTING GROUP, LLC WILL NOT BE LIABLE TO YOU OR ANYONE ELSE UNDER ANY TORT, CONTRACT, NEGLIGENCE, STRICT LIABILITY, PRODUCTS LIABILITY, OR OTHER THEORY WITH RESPECT TO THIS PRESENTATION OF INFORMATION.
For more information, visit our Disclaimer: www.goldmanresearch.com
Leave your comments