Of the 30 stocks on the Dow Jones Industrial Index (DJINDICES:^DJI), 24 were trading in positive territory at midday. Yet the Dow itself traded down 0.1% anyway. What's going on here?
Elementary, my dear Watson. IBM (NYSE:IBM) plunged 5.5% as the computing giant's third-quarter report failed to set the Street on fire. Earnings met Street estimates, but revenue fell short, and management simply reiterated existing full-year earnings targets. And that's simply not good enough for a stock that had climbed 15% over the last three months, leaving the rest of the Dow eating its dust.
But how can one stock's misfortunes single-handedly erase 24 winners? Again, it's very simple: No other stock determines the Dow's total value the way IBM does.
Big Blue's roughly $200 share price gives it an 11.3% weight in the price-based Dow. Today's IBM plunge took 89 points away from the Dow, easily destroying the 13 points added by Caterpillar's (NYSE:CAT) 2% rise and the eight points gained from Walt Disney's (NYSE: DIS) 2.1% jump. You may want to point fingers at Intel (NASDAQ: INTC), as well, since the chip maker lost 2.8% of its value on another disappointing earnings report -- but that's just a five-point hit to the Dow, given Intel's far lower share price.
This is one of the few situations where stock splits actually make a difference. If IBM decided to split its expensive shares 10 to one, its importance to the Dow would fall roughly in line with Intel's. A fourfold split would align it with Disney, and a simple doubling of IBM's share count would make it comparable to Caterpillar.
This oddity also explains why Apple (NASDAQ:AAPL), Google (NASDAQ: GOOG), and (heavens, no!) Berkshire Hathaway (NYSE:BRK-A) (NYSE: BRK-B) don't have a place in the Dow. Adding the roughly $700 Google or Apple stocks to the mix would tip the scales very dramatically in their direction, and inviting Berkshire's $135,000 "Class A" shares would effectively turn the Dow into an ETF tracking Berkshire's returns. That's just not in the cards.
Fool contributor Anders Bylund owns shares of Google. The Motley Fool owns shares of Apple, Berkshire Hathaway, Walt Disney, Google, International Business Machines, and Intel. Motley Fool newsletter services recommend Apple, Berkshire Hathaway, Google, Intel, and Walt Disney. 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.