The appeal of stock indices is their ability to serve as guides to the market's daily gyrations. Many track hundreds or even thousands of stocks, but the most famous index of all -- the Dow Jones Industrial Average (DJINDICES:^DJI) -- keeps it simple, with a slim list of 30 companies representing the best of American industry. That makes the Dow easier to follow, but it can also make it easier for a single stock to push the blue-chip index around, especially if that company has one of the higher share prices of the Dow's components.
With the first six months of 2014 in the rearview mirror, we can now see just which stocks have hurt the Dow most. This is a little more complex than simply pointing out which stocks have fallen farthest in the past six months, since the Dow's price-weighting structure will result in larger moves when a stock trading at triple-digit prices goes wild. To illustrate how this works, let's look at the Dow's three worst-performing stocks for the first half of 2014:
This year, the Dow's three biggest losers have also been the biggest drag on the index's progress. That doesn't always happen, but when the Dow's top losers also happen to have some of the highest share prices of all 30 components, the downward pull can be powerful. To put this in perspective, the S&P 500 has performed more than twice as well as the Dow this year, as no one component has as great an impact on that index as Boeing (NYSE:BA), Goldman Sachs (NYSE:GS), and Visa (NYSE:V) have on the Dow. The largest S&P component has a weight of 3.2%, but Boeing, which has the lowest share price of this year's three worst-performing Dow components, has an index weight of 4.9%. The three worst Dow stocks for the first half of 2014 accounted for more than 19% of the index's momentum this year!
It's easy enough to see which stocks were the Dow's biggest drags, but we should look a little deeper to figure out why they were so weak, and possibly determine if they'll continue to be anchors around the index's neck for the second half of 2014.
Third-biggest drag: Boeing (reduced the Dow's growth by 0.3% in the first half)
Boeing strung together the strongest performance of any Dow stock last year, nearly doubling its share price and far surpassing the index's second-best gainer. It shouldn't be too surprising that the aerospace giant slipped from its perch, particularly as it has booked far fewer orders for new aircraft during the first half of 2014 than it did for the same stretch in 2013. Part of this slowdown is no doubt due to the fact that orders spiked last year after Boeing successfully ironed out the known defects in its next-generation 787 Dreamliner jets. Nonetheless, last year's big bounce also boosted Boeing's P/E to its highest levels since 2010, and it currently leads its fellow defense contractors by a wide margin in valuation terms.
Boeing continues to ride what it hopes will become a veritable tidal wave of airline growth, as the company projects $4.8 trillion in new airplane demand over the next two decades. However, that doesn't mean the stock is a bargain right now, and as long as investors look elsewhere for value it's likely that Boeing will continue to suffer the hangover from last year's outsized pop. This reversal of fortune has taken Boeing from first last year to worst for the first half of 2014 in terms of gains among the Dow's components, but since it's only the sixth-largest component by weight, it doesn't hold the index down quite as much as these next two losers.
Second-biggest drag: Goldman Sachs (reduced the Dow's growth by 0.3% in the first half)
Goldman Sachs narrowly edged Boeing with a 0.31% drag on the Dow for the first half, compared to the airplane builder's 0.28% damage to Dow gains. This is primarily due to Goldman's larger share price, which gives it the Dow's third-largest weighting.
Goldman has been one of the Dow's biggest drags since it was added to the index nearly a year ago, but its fundamentals haven't exactly justified any significant share-price growth -- trailing 12-month earnings per share have barely grown over the past year, and revenue has dwindled a bit, as the investment bank's progress seems to have flatlined after a strong rebound from its early post-recession woes. The problem seems to stem from an ongoing decline in fixed-income trading volume, which has long been one of Goldman's most reliable sources of revenue -- the bank ranked first in revenue from both equity trading and proprietary trading among all American banks last year. This could improve in the future, but it may not be enough to change abysmal investor perceptions of the "Vampire Squid" relative to its none-too-pristine American banking peers.
Biggest drag on the Dow: Visa (reduced growth by 0.4% in the first half)
The world's biggest credit card issuer is also the Dow's largest component by weight despite being only the 17th-largest Dow component by market cap. It's the only component to currently boast a share price above $200, which earned it a weighting of 8% at the end of the first half. Unfortunately for Dow-watchers, Visa's 5% decline in the first half was also the second-worst performance of all 30 components. Like Boeing, this underperformance followed excellent growth in 2013 that saw Visa's share price grow by nearly 50% -- with 12% tacked on in the three and a half months following its inclusion on the Dow last September.
Visa's had a lousy first half despite putting together respectable growth through the end of the first quarter. Reduced guidance and a maelstrom of potential threats have changed investor perceptions toward the company -- many no longer look at the payment processor as the undisputed master of its domain, but as an aging king in a crumbling castle. That might not reflect reality, but perception matters when it comes to stocks. Until investors can again see Visa as a dominant force in the financial world, it's likely to exert an outsized negative influence of the Dow.