How 3 Dow Ex-Components Have Crushed the Market

Breaking up is hard to do, and in this case, it was a bad move for the Dow -- and a great one for shareholders in these stocks.

Feb 15, 2014 at 9:02AM

As another Valentine's Day has come and gone, it's a good time to focus on relationships both past and present. As stock benchmarks go, the Dow Jones Industrials (DJINDICES:^DJI) are relatively faithful, making changes to the average's constituent list only infrequently. As we saw last September, though, Dow breakups do happen -- although in this case, things have turned out quite well for the stocks the Dow rejected, as Alcoa (NYSE:AA), Hewlett-Packard (NYSE:HPQ), and Bank of America (NYSE:BAC) have all topped the Dow's 5% gain by a substantial margin.

For Alcoa, the secret to the aluminum giant's 38% gains since last September is its commitment to finding ways to go beyond simply selling aluminum as a commodity. In December, Alcoa signed a supply contract with Airbus, showing the huge potential that the aerospace industry has to provide demand not just for aluminum generally but for specially crafted aluminum products designed not just for light weight but also durability and functional design. Similarly, the redesign of Ford's (NYSE:F) F-150 pickup to use more aluminum will benefit Alcoa, which is one of Ford's top suppliers as the automaker aims to cut vehicle weights and improve fuel efficiency. By recasting itself as a high-margin specialty producer, Alcoa can recover even in a poor environment for raw aluminum prices generally.

Hewlett-Packard is up more than 42% since giving up its place in the Dow, as the former PC giant aims to find a new role in the tech industry. The company has made big strategic moves in recent months, with everything from selling 2,400 mobile patents to industry leader Qualcomm and unveiling an Android-driven desktop computer to entering the 3-D printing business and releasing a smartphone in India. These disparate strategies might smack of desperation, but they show the drive with which HP is looking to find a new, viable niche in a rapidly evolving tech world.

Bank of America is the laggard of the three rejected Dow stocks, but it's still up almost 16% since leaving the Dow. Huge buybacks of shares at an average price below $14 per share have proven prescient for the big bank, and strength in its consumer credit card division as well as its global wealth and investment management business has driven profits higher. The bank still has further to climb, as it still pays a minuscule dividend, and its return on equity is relatively low. But having defied the risk of failure during the financial crisis, Bank of America looks primed to keep rising as long as the industry holds up.

Look beyond the Dow
What these three stocks show is that being in the Dow isn't the end-all be-all of investing. Often, leaving the Dow seems to be a good incentive for companies to really start taking off, finding ways to reinvent themselves and prosper.

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Dan Caplinger owns warrants on Bank of America. The Motley Fool recommends Bank of America and Ford and owns shares of Bank of America, Ford, and Qualcomm. Try any of our Foolish newsletter services free for 30 days. 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.

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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