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Is a Scary Deja-Vu Moment Coming for the Dow?

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The committee in charge of the Dow Jones Industrials (DJINDICES: ^DJI  ) doesn't make changes very often, but when it does, those changes usually reflect the changing fortunes of the companies involved. Unfortunately for investors who follow the Dow's moves, the Dow Index Committee's timing isn't always the best, with some cases in which stocks were added to the Dow at just about the worst possible time.

Is that bad timing happening again this time around? Let's take a look at whether investors should be looking at any potential warning signs.

Can the new Dow stocks' outperformance last?
One of the biggest mistakes that many investors make it to chase performance. Yet at least when you look back over the past year, it looks like the Dow might be doing some performance-chasing of its own.

Nike and Visa (NYSE: V  ) have both more than tripled the Dow's gains over the past year, while Goldman Sachs (NYSE: GS  ) comes in with a near-triple of its own.

V Total Return Price Chart

Dow Stocks Total Return data by YCharts.

Of course, investors want to see stocks in the Dow that have managed to show a track record of success. Visa's card network dominates the industry, and the company is working hard to sustain its competitive advantage by moving into mobile-payment processing. Goldman has recovered from the financial crisis and continues to have a reputation for finding ways to profit even as regulators have clamped down on the financial industry. Nike has thus far held off competitors to sustain its empire atop the athletic-footwear business.

An eerily familiar story
The problem, though, is that the performance of the Dow's three incoming stocks looks awfully familiar to those who follow Dow history. Take a look at these figures from 1999:

^DJI Chart

Microsoft and Intel Return data by YCharts.

Both Microsoft (NASDAQ: MSFT  ) and Intel (NASDAQ: INTC  ) had also tripled the Dow's returns over the year before they joined the average, putting the finishing touches on a huge bull-market run that catapulted the tech giants into the uppermost echelons of the stock market.

Yet the future looked a lot uglier for those stocks:

^DJI Chart

Microsoft and Intel Return data by YCharts.

The tech bust punished both stocks soon after they joined the Dow, and even 14 years later, they still haven't managed to return to break-even.

New Dow stocks aren't a sure thing
Before you panic over Nike, Goldman, and Visa, you should realize that many new Dow stocks have produced strong performance after joining the average. New entrants aren't doomed to bad performance.

But you also shouldn't assume that joining the Dow will be an automatic moneymaker for investors. Future success all depends on what happens to the fundamentals of each company's business in the years to come.

If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

Read/Post Comments (3) | Recommend This Article (8)

Comments from our Foolish Readers

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 September 15, 2013, at 11:25 AM, techy46 wrote:

    Ok, let's put Apple, Google, FaceBook and Twitter in the DOW!

  • Report this Comment On September 15, 2013, at 2:37 PM, luckyagain wrote:

    From an investor's viewpoint, the S&P 500 is much better because it is much more diversified that DJIA. The major thing about the DJIA is that it is much touted and much watched.

  • Report this Comment On September 15, 2013, at 3:57 PM, FartyMcFarterson wrote:

    It's funny the comparison of tech stocks to non-tech stocks, the Tech Bubble to post Bubble AND then the 'back peddle" with :

    "Future success all depends on what happens to the fundamentals of each company's business in the years to come."

    Maybe I'm off my rocker...

    Is there a sneaker bubble?

    Visa is unstoppable and Nike is too.

    GS just makes money...

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Related Tickers

9/27/2016 4:45 PM
^DJI $18228.30 Up +133.47 +0.74%
GS $162.89 Up +1.41 +0.87%
Goldman Sachs CAPS Rating: ***
INTC $37.18 Up +0.53 +1.45%
Intel CAPS Rating: ****
MSFT $57.95 Up +1.05 +1.85%
Microsoft CAPS Rating: ****
V $82.16 Up +0.35 +0.43%
Visa CAPS Rating: *****