New Dow Jones Industrial Average Candidates?

The Tribal Council Has More Voting Off To Do

As of this writing, there are 4 stocks in the Dow Jones Industrial Average that are trading under $10 per share (and several others that are close):

Citigroup (C)
Bank of America (BAC)
General Motors (GM)
Alcoa (AA)

According to Jim Bianco of Bianco Research:

 “Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10, gets tossed out.“

The deal is that Dow Jones is trying not to exacerbate the horror show going on with these stocks by giving index funds that track the Dow and other shareholders yet another reason to flee from them.  For that reason, I believe, they are getting a pass, similar to what NASDAQ is doing by allowing a grace period for issues trading there at under $2 that they don’t want to kick out just yet.

Sooner or later, Dow Jones will get back to business and go looking for replacements to shore up the representation of it’s index and weightings.  The question then becomes, who will replace some of the destroyed companies that clearly need to come out of the index?  It’s not like there is another US automaker that is in any better shape than GM, for example.

First, a bit of perspective…The DJIA has a recent history of kicking out companies at bottoms and adding companies at tops when they make changes to their index components.  Microsoft (MSFT) and Intel (INTC) were added (the first NASDAQ names ever on the Dow) at the peak of the dot com bubble in 2000 and have never even come close to seeing their highs from those days since.  Chevron (CVX) was recently added as oil was racing toward $100 and then peaking out at around $150.

The difference now is that there aren’t any companies riding a wave of earnings growth or prosperity that will be added at a “top” for their industries, like the prior examples.  In fact, the number of mega-cap stocks still in existence is shrinking faster than you can say the word rebalance.

You’ve got a handful of domestic miners that may make sense in place of Alcoa, given the group’s under-representation in the index, but they just aren’t that big in terms of market cap.  You also have Monsanto (MON), which is both agriculture and biotech and has grown up quite nicely over the last few years.  These could all be possible additions.

There also may be the possibility that Goldman Sachs (GS), which is now a bank holding company and has one of the more respectable share prices in the sector, could replace BAC or C to represent the financial services industry.  Wells Fargo (WFC) is also well-established enough for consideration and they are no longer just a west coast entity with their recent swallow-up of Wachovia.

And how about Google (GOOG)?  Let’s keep it real, the new jobs and innovation over the next decade won’t be coming out of Detroit (unless Eminem and Kid Rock get more prolific), they’ll be coming out of Mountain View, California and everyone knows it.  The problem is, Google, which is involved in advertising and media, would be a better replacement for a Disney (DIS) than a General Motors.

I suppose you could make the case for adding SKF, the Proshares Ultra Short Banks ETF, as that is the only place where anyone has made any kind of money over the past year!

At any rate, it will be interesting to see who gets cut and who gets added when the index keepers decide the time is right.  We’ll be sure to revisit the discussion then, but in the meantime, please feel free to comment below if you have any thoughts on the possibilities.

Full Disclosure:  I am currently long Wells Fargo and Chevron in client accounts.  The mention of any companies, stocks or indexes in this post is purely for informational purposes and does not constitute an invitation to buy or sell any securities.  For the full disclaimer, please see the Terms & Conditions of this site.