Morning Dow Report: 2 Stocks That Would Fill the Dow's Gaps

If the Dow wants to be a relevant measure of the U.S. economy, adding two representative stocks would help immensely.

Jan 28, 2014 at 11:00AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Millions of investors look to the Dow Jones Industrials (DJINDICES:^DJI) as their key barometer of the stock market. Yet as we've seen throughout the past week, the Dow doesn't always move in the same direction as other parts of the market. For instance, before the market opened this morning, it looked as though the Dow would take a much different path from the Nasdaq Composite because of Apple's disappointing earnings report -- even though the two benchmarks are now both moving upward.

Yet even if the idea of adding Apple to the Dow is a nonstarter, there are other glaring omissions in this index that make it less than a perfect measure of the U.S. stock market. Let's look at a couple of areas where the Dow should consider adding stocks to be more representative of the economy at large.

When General Motors (NYSE:GM) went bankrupt in 2009, it made sense for the Dow to evict the automaker from its ranks. But now that the auto industry is back and driving ahead at full speed, the absence of the two publicly traded members of Detroit's Big Three leaves out a key part of the U.S. economy. According to the Center for Automotive Research, the auto industry has historically contributed between 3% and 3.5% of total GDP, employing more than 1.7 million people directly. When you consider jobs that rely on the sector, about 4.5% of private-sector employment is linked to the auto industry, according to data from the Auto Alliance.

At their current market capitalizations, both General Motors and Ford (NYSE:F) would be at the low end of the Dow 30. Ford's extremely low share price would give it an inconsequential impact on the blue-chip index, carrying only two-thirds of a percent of the Dow's total weight. General Motors would fare somewhat better, with a weighting of roughly 1.5%, making it a more logical choice even though some investors would balk at giving a bankrupt company a second chance. If Ford executed a reverse split to make its share price higher, its bailout-free history and strong earnings growth in its fourth-quarter report today would make it a more desirable choice for many investors.

Basic materials
There's nothing particularly exciting about commodity businesses, but they do make up a substantial portion of the U.S. economy. Energy is reasonably represented in the Dow, but providing other basic materials is critical to the proper functioning of the industrial sector. Yet after Alcoa's dismissal from the Dow and as DuPont moves away from its traditional chemicals business to focus more on agriculture, the subsector is underrepresented in the average.

The challenge, though, is that most U.S. companies aren't big enough to justify a place in the average. The steel sector, for instance, is incredibly fragmented, with former Dow component U.S. Steel (NYSE:X) carrying a market cap of less than $4 billion and therefore making it no better a choice for the index than Alcoa was. In mining and metals, adding Freeport-McMoRan Copper & Gold (NYSE:FCX) would be a bit more palatable, given the company's $33 billion market cap and its leadership role in the world copper market. Yet even there, Freeport's recent diversification into the energy industry makes it a less-than-perfect choice to represent nonenergy basic materials -- even if it might be the best among the choices available.

No matter which stocks you add to the Dow, the average will never be perfectly representative of the U.S. economy. But by addressing these two glaring omissions, the Dow could answer concerns that it no longer serves its function as the leading benchmark of the stock market.

Should you look beyond the Dow?
If you want the best stocks, you might want to consider going beyond the Dow 30 entirely. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and even though it's not in the Dow, it's a stock that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Dan Caplinger owns shares of Freeport-McMoRan Copper & Gold. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford and Freeport-McMoRan Copper & Gold. 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 Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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