Are These Tech Giants Destined for the Dow?

Letting new companies into the Dow Jones Industrials (INDEX: ^DJI  ) doesn't happen very often. But now that the largest stock by market cap is one that isn't in the Dow, at least some people believe that it's time for the Dow to make a change.

Over the weekend, Barron's ran a cover story in which it called for the Dow's handlers to get Apple (Nasdaq: AAPL  ) into the Dow. Pointing to several companies as prospects to get booted out of the average, the story argues that without Apple and fellow tech giant Google (Nasdaq: GOOG  ) , the Dow could lose its value as a representative market benchmark.

What the Dow needs
The Motley Fool has run several articles about the problems of the Dow. The biggest barrier to entry for both Apple and Google is the Dow's insistence on using price-based weighting, which has the benefit of being simple but makes it practically impossible to admit companies whose shares trade at very high levels. Apple has been reluctant to split its $600 shares, and Google's recently announced 2-for-1 split would still leave shares trading at around $300.

Still, an invitation to the Dow might be enticement enough for them to consider the move. But the other difficulty comes from making space for new entrants without skewing the index. With a market cap of only $10 billion, Alcoa (NYSE: AA  ) has struggled recently despite a fairly strong first quarter and seems like an obvious candidate to exit the Dow. But evicting one of the only remaining true industrial stocks in favor of adding to the four tech stocks that are already within the Dow could make the average very tech-heavy -- even if Apple and Google agreed to further stock splits. Meanwhile, Hewlett-Packard (NYSE: HPQ  ) has also had difficulties and would potentially free up a tech spot, but with a market cap approaching $50 billion even after terrible performance from its shares, it's hard to justify booting HP out of the average.

Perhaps the answer is to expand the Dow beyond 30 stocks. The last time the Dow expanded was in 1928, but the move isn't unprecedented. Moreover, as the Dow has gone beyond true industrial stocks to encompass nearly the entire market, boosting representation makes a great deal of sense -- and could make it a lot easier for big players like Apple and Google to gain a voice.

Don't hold your breath
Of course, the history and traditions of the Dow make changes hard. The same thing holds for stocks that you've followed forever. But with earnings season still continuing, you should expand your horizons and look at the Fool's latest special report, in which we reveal five stocks you truly can't afford to ignore. Please accept my invitation to read this free report today by clicking here -- but do it now, before earnings season ends.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. You can follow him on Twitter here. The Motley Fool owns shares of Google and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Google, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 30, 2012, at 10:52 PM, crca99 wrote:

    I read this and followed the links, and I still wouldn't dare explain to someone the meaning of price based weighting and its impact on the Dow. It would be nice if you had elaborated.

  • Report this Comment On May 01, 2012, at 10:12 AM, nakayle wrote:

    It has never made sense to me that we gauge the performance of the whole market by small handful of companies. Perhaps this was necessary in the pre-computer age when computation had to be done manually but today it is possible to have an index that includes every stock on both exchanges.

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