The Dow Jones Industrial Average (INDEX: ^DJI ) is the best-known measure of the stock market in the U.S., if not the world. So every time the Dow makes a change to its list of 30 stocks, its reputation is on the line. Picking long-term winners is essential for the Dow to maintain its success.
So today, I'd like to turn to the most recent additions to the Dow, to see whether the newest initiates have lived up to the reputation of being a Dow component. As we'll see, the past few years have been very tough for some Dow stocks, yet some of the newbies have distinguished themselves already with strong performance.
Since early 2008, the Dow has added five new members. In February 2008, Bank of America (NYSE: BAC ) and Chevron (NYSE: CVX ) replaced Altria and Honeywell. Then in September of that year, AIG got booted out in favor of Kraft Foods (NYSE: KFT ) . Finally, soon after the worst of the financial crisis, Citigroup and bankrupt General Motors got replaced by Cisco (Nasdaq: CSCO ) and Travelers.
Let's consider each of these five stocks in turn, grouping them by their performance.
The big winners
Chevron turned out to be the big winner in this group of five, jumping almost 39% versus a 6% gain for the S&P 500 over the same period. But it came with plenty of volatility, as oil prices briefly came close to the $150-per-barrel level shortly after the stock joined the Dow before falling sharply during the financial crisis, bringing the share price way down.
Still, with the return of near-$100 oil, Chevron has recovered. Its operations have truly global scope, and despite recent weakness at its refinery division, its exploration business is quite solid.
Kraft is another winner, posting a gain of more than 32% versus a 17% rise for the S&P since the company joined the Dow. The food giant has largely integrated its big purchase of Cadbury and is now seeking to refine its business by splitting into two pieces. Following in the footsteps of its own once-parent, Altria, Kraft will spin off its high-margin domestic grocery business, leaving the global snacks segment that includes Cadbury as well as Oreo and other brands. The move should make Kraft more efficient going forward.
In the neutral camp, we find Travelers. The company has jumped 45% since its June 2009 admission to the Dow, falling just short of the S&P's 48% gain.
But the company hasn't had an easy go of it. Last year's string of natural disasters both in the U.S. and around the world hit Travelers hard, with profits down sharply on soaring catastrophe losses. Travelers survived better than some of its competitors, however -- and in the long run, those losses may enable Travelers to boost its premiums, bringing in more revenue from customers going forward.
Unfortunately, the final two new members of the Dow haven't posted very good performance. Cisco has managed only a gain of 1% versus the S&P's 48% gain over the same period, while B of A is down more than 80% -- much worse than the 6% return that the S&P posted.
For Cisco, the aftermath of the financial crisis was no easier than surviving the market meltdown itself. After years of domination of the networking-equipment space, Cisco started falling short of expectations, raising doubts about CEO John Chambers' leadership and whether the company could still compete against smaller rivals. In the past several months, though, Cisco has made a big comeback, and with the promise of economic growth around the corner, Cisco should be in prime position to take advantage.
Meanwhile, Bank of America's woes are well known. The Dow certainly had bad timing in picking a bank stock that would later be one of the hardest hit in the mortgage crisis. Even as the stock has posted a huge return so far in 2012, it's been beaten down so much that even a full recovery for B of A won't give much help to those who bought the stock back in February 2008, when it joined the Dow.
Wait and see
After less than four years, it's far too early to tell whether these five stocks will stand the test of time. But based on early results, it's pretty easy to see which stocks will struggle and which should set a new standard of excellence for the Dow going forward.
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