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Of the 30 stocks on the Dow Jones Industrial Index (INDEX: ^DJI ) , 24 were trading in positive territory at midday. Yet the Dow itself traded down 0.1% anyway. What's going on here?
Elementary, my dear Watson. IBM (NYSE: IBM ) plunged 5.5% as the computing giant's third-quarter report failed to set the Street on fire. Earnings met Street estimates, but revenue fell short, and management simply reiterated existing full-year earnings targets. And that's simply not good enough for a stock that had climbed 15% over the last three months, leaving the rest of the Dow eating its dust.
But how can one stock's misfortunes single-handedly erase 24 winners? Again, it's very simple: No other stock determines the Dow's total value the way IBM does.
Big Blue's roughly $200 share price gives it an 11.3% weight in the price-based Dow. Today's IBM plunge took 89 points away from the Dow, easily destroying the 13 points added by Caterpillar's (NYSE: CAT ) 2% rise and the eight points gained from Walt Disney's (NYSE: DIS ) 2.1% jump. You may want to point fingers at Intel (Nasdaq: INTC ) , as well, since the chip maker lost 2.8% of its value on another disappointing earnings report -- but that's just a five-point hit to the Dow, given Intel's far lower share price.
This is one of the few situations where stock splits actually make a difference. If IBM decided to split its expensive shares 10 to one, its importance to the Dow would fall roughly in line with Intel's. A fourfold split would align it with Disney, and a simple doubling of IBM's share count would make it comparable to Caterpillar.
This oddity also explains why Apple (Nasdaq: AAPL ) , Google (Nasdaq: GOOG ) , and (heavens, no!) Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) don't have a place in the Dow. Adding the roughly $700 Google or Apple stocks to the mix would tip the scales very dramatically in their direction, and inviting Berkshire's $135,000 "Class A" shares would effectively turn the Dow into an ETF tracking Berkshire's returns. That's just not in the cards.
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