Motley Fool Staff
Nov 1, 1999 at 12:00AM
Someone at Dow Jones must have been listening to us. The biggest, baddest of the Rule Makers have been given the nod to take their rightful place among the 30 companies most Americans use to gauge the performance of the U.S. stock market.
After years and years of descending deeper and deeper into irrelevance, the Dow Jones Industrial Average (DJIA) has finally altered itself to bring its holdings more in line with the reality of American commerce. I will give my own tip o' the hat to the people at Dow Jones (NYSE: DJ) for trying to maintain as much continuity as possible in their indices. But my word, how long has Microsoft (Nasdaq: MSFT) been larger than Union Carbide (NYSE: UK)? The ascendancy of computers was not a fad, but a tectonic shift, and the people running the index sure took their own sweet time to catch up.
Now, I mention this for several reasons. First, to point out that the DJIA, which most people on the face of the planet use as a proxy for the performance of the American stock market, does not really represent anything more than the aggregate of the companies on the list. I specifically use the word "aggregate" to point out one of the biggest weaknesses in the methodology: that each company is valued exactly the same as every other company. Microsoft, with its swaggering market capitalization of $478 billion affects the movement of the DJIA exactly the same as Caterpillar (NYSE: CAT), at $19.3 billion. I don't necessarily believe the best way to value the average is through market value weighting, but doesn't it still seem strange that a company with 25 times the value affects "the market" the same as another?
Second, DJIA has finally done away with one of the silliest "rules" they had: that of limiting their universe of companies to those listed on the New York Stock Exchange. By electing to consider companies listed on Nasdaq (and I would assume that American Stock Exchange companies are now eligible as well), they have acknowledged that the "Big Board," as the NYSE is sometimes known, is not the end-all, be-all of exchanges any more. It is a simple reality that the Nasdaq is not necessarily a stopping point for companies until they are big enough to move, as evidenced by its emergence as the exchange of choice for most telecommunications and Internet companies. This is also a good move for the DJIA.
This does not mean that the New York Stock Exchange is laying down to the supremacy of the Nasdaq, by any stretch of the imagination. In fact, the NYSE rightfully continues to hope that such behemoths as Microsoft, Intel (Nasdaq: INTC), and Cisco (Nasdaq: CSCO) will elect to move over to it. In fact, the NYSE has reserved the ticker symbol "M" specifically for Microsoft in the eventuality that they do change their minds.
So let's take a look at what the DJIA has done. Unquestionably, they've done a good thing by removing some of the less widely relevant companies -- Union Carbide, Goodyear Tire (NYSE: GT), Sears Roebuck (NYSE: S), and Chevron (NYSE: CHV) -- and replacing them with Microsoft, Intel, Home Depot (NYSE: HD), and SBC Communications (NYSE: SBC). The companies that were removed were no more being punished, however, than the ones added were being rewarded, except on the broadest levels. The fact is that the DJIA had kept itself significantly overweighted in chemicals (DuPont, Union Carbide, Exxon) and petroleum (Exxon, Chevron) relative to their overall relevance to the economy. Don't misunderstand what I am saying here: Chemicals and petroleum will continue to be central drivers of the economy, but to have them represented at the same level as computer technology and at the total expense of software didn't make sense. And Sears, well, they've had their lunch eaten by Home Depot and Costco (Nasdaq: COST) for more than a decade.
A simple math exercise will bear out that the choice was a good one. The combined market cap of those companies outgoing: $84 billion. The combined market cap of the incoming companies: $943 billion.
So I appreciate the firm grasp on the obvious that Dow Jones has shown by making these moves. Still, the DJIA leaves so much to be desired. It still does not take into account the global nature of our economy, nor does it address the problem of still being so heavily weighted toward heavy industry in an age in which the economy is increasingly driven by information.
At any rate, I have the distinct honor of being the deciding member of the Rule Maker team for this month's $500 investment. As you have read in the past two reports, the choice among my colleagues has been unanimous, that we should put the money in Intel. I agree. Still, being the consummate blabbermouth, I'm still going to editorialize a bit.
My choice had come down to a party of three: Intel (Nasdaq: INTC), Pfizer (NYSE: PFE), or Coca-Cola (NYSE: KO). I am a firm believer in the merits of buying a company when others are afraid of it. Particularly in the case of Coke, this would certainly apply at this time. But over the past month the Rule Maker has identified a number of fundamental concerns in how these companies state their earnings; in Coke's case, it's treatment of marketing payments between itself and its bottlers, and for Pfizer, the decline of its management of cash flows.
So I say, "Bad dogs! No biscuits!"
These concerns, which I hope to see addressed over the coming months, coupled with Intel's new reinvention of itself as the center of a worldwide network of PCs, servers, and peripherals, tip the scales over to Mr. Grove & Co. I am also still so utterly impressed by Rob Landley's description of the basic difference in strategy between Intel and its main competitor, AMD (NYSE: AMD), that I believe Intel is only gaining more momentum.
You see, as Rob reported, AMD recently released its Athlon chip, which is faster than anything Intel has in its stable, even its high-end Xeon chips. But AMD has a tradition of being first on the dance floor but woeful in follow-through in actually delivering working microchips in sufficient volume to give Intel a run for its money.
For as long as AMD is in the business, I believe that Intel has a wonderful incentive to keep tearing up the track. AMD periodically puts out a credible competitive product, a process I believe has the effect of not only getting AMD shareholders whipped into a frenzy, but also drives Intel even harder to succeed.
So, as in the past, this transaction will take place sometime in the next five business days.
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Motley Fool Staff
- Nov 1, 1999 at 12:00AM