The New Dow Crowd (Fool Plate Special) October 26, 1999

An Investment Opinion

The New Dow Crowd

By Brian Graney (TMF Panic)
October 26, 1999

For the second time in less than three years, the folks at Dow Jones & Co. are making changes to their biggest claim to fame and most cherished possession -- the Dow Jones Industrial Average.

Getting kicked out of what is undoubtedly the most recognized U.S. stock market barometer are lead-footed integrated oil and gas company Chevron (NYSE: CHV), tired tire maker Goodyear Tire & Rubber (NYSE: GT), fallen retailing star Sears, Roebuck & Co. (NYSE: S), and soon-to-be-bought-out chemical concern Union Carbide (NYSE: UK). The new kids on the block have a decidedly technological flavor and include Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC), SBC Communications (NYSE: SBC), and Home Depot (NYSE: HD).

"The changes we are announcing today will make the Dow Jones Industrial Average even more representative of the evolving U.S. economy, as the Average -- and the nation -- enter a new century," Wall Street Journal managing editor Paul Steiger commented. Looking at the changes one-by-one, the adjustments make a ton of sense.

Although oil remains one of the largest global industries around, it will get more than enough representation in the index when current Dow component Exxon (NYSE: XON) completes its planned merger with Mobil (NYSE: MOB). From that point of view, Chevron is really being replaced by Mobil, not by one of the four newly added companies. Meanwhile, Union Carbide is set to be acquired by Dow Chemical (NYSE: DOW) later this year, which opens up another spot in the index. Lest you think chemicals will not be represented at all in the new-look Dow, it's important to keep in mind that Exxon's chemical business racked up sales last year that were nearly twice Union Carbide's total revenues.

Filling the Chevron and Union Carbide holes are Intel and Microsoft, two leaders of the technology industry that the bigwigs at Dow Jones somehow have always managed to seriously underweight in their prized index. Before Hewlett-Packard (NYSE: HWP) was added in 1997, the only technology-related component had been IBM (NYSE: IBM). That's pretty crazy under-representation for an industry that is often credited with creating more value in the marketplace for more people than any other industry since the Industrial Revolution. Intel and Microsoft also represent the first Nasdaq-traded stocks to be included in the Dow, another long overdue advancement.

The other two moves are more trend-related, making them more interesting and possibly somewhat surprising to some observers. The inclusion of Home Depot can be interpreted as the Appomattox in the victory of the "category killers" over the jack-of-all-trades merchandisers, which ran the retailing show for most of this century. Today, the only thing that Sears and its remaining broadline brethren run are lame TV commercials and a never-ending stream of holiday sales promotions. In the other change, the keepers of the Dow have opted for the wonderful and exciting information superhighway of tomorrow over the formerly wonderful and exciting (but now pot-holed and cursed) four-lane interstate highway of yesteryear by dumping Goodyear in favor of SBC.

For the most part, today's changes to the Dow will have little effect on individual stock investors outside of giving everyone a more accurate picture of what the U.S. business environment is all about on the cusp of the 21st century. Fools using the Foolish Four or other investing strategies based on the Dow, however, will need to make some adjustments. Check in with the Foolish Four Portfolio tonight and throughout the rest of the week for details on how the changes will affect the current holdings of the different variations of the main Dow Investing strategies.