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Published: August 13, 2010
The Dow Jones Industrial Average isn't
considered the most accurate reflection of the market's overall
performance, but few can argue against the fact that it is the
most widely recognized and highly symbolic representation of the
state of American stocks.
Outside of the large-cap, old-line American companies among the
Dow Jones Industrials, there are more than 10,000 publicly
traded stocks from which investors can pick and choose. But Dow
component companies carry the panache of selling a "blue-chip"
stock investors might regard as part of an elite grouping worthy
of their money.
Since Charles Dow introduced his 12-stock industrial
index in 1896 to accompany The Wall Street Journal's
transportation index, about four-dozen adjustments have been
made, including the expansion to a roster of 30 in 1928. Most of
the original dozen have gone the way of the buggy whip and are
out of business, or morphed into another direction in the past
114 years. One familiar name remains: General Electric (NYSE:
GE) -- however, the
conglomerate was yanked twice around the beginning of the
20th century, only to return.
It has been more than a year since the Dow was rejiggered, when
Cisco Systems (Nasdaq: CSCO) and Travelers Cos. (NYSE:
TRV) replaced the bankrupt old General Motors and
Citigroup (NYSE: C). There's no set pattern for reviews of
the composition of this price-weighted index, but maybe it's
time for the committee members appointed in March to consider
jettisoning the weakest links and bringing in some fresh blood.
In the meantime, it's worthwhile to speculate about which
lightweights among the heavyweights could be jettisoned in the
next rebalancing. Such a focus could provide clues as to which
stocks to avoid -- or short -- and which to hold for the long
haul.
Almost from its launch, the Dow has contained stocks of
companies not purely "industry" in a traditional smokestack
sense. So which stocks are most vulnerable to be dethroned from
this small subset of the U.S. stock market?
What does the stock of American Express (NYSE: AXP) offer
to investors that a Visa (NYSE: V) or MasterCard
(NYSE: MA) doesn't? As IBM (NYSE: IBM) transitions
from selling and servicing big iron to going big on business
services and Microsoft (Nasdaq: MSFT) dawdles along in
the slow lane of technology's innovation highway, is it time to
substitute a Nasdaq-traded Apple (Nasdaq: AAPL) or
Google (Nasdaq: GOOG)?
Although GM is gone, should the American
auto industry be ignored, considering the renaissance of Ford
Motor (NYSE: F)?
Or, when the new GM pulls the trigger on its expected
IPO, will it deserve to be called a blue-chip once again?
If the keepers of the Dow do decide to make changes, there is
one stock I think is especially in danger of being tossed.
The most vulnerable stock on the Dow
Perhaps the most vulnerable member is Alcoa (NYSE: AA).
Shares peaked just north of $40 back in 1999, there hasn't been
a
stock split since 2000, and it hasn't approached that $40
level since 2007. Admittedly, second-quarter results, which
included a $136 million profit on stronger-than-anticipated +22%
revenue growth, gave rise to a more bullish outlook, especially
when it comes to predictions of growth in global demand for its
metals. Still, 10 of First Call/Thomson Financial's 19 analysts
have the stock rated a "hold" or lower, with one saying it's
time to sell.
Recently, Alcoa announced a refinancing move under which it
would buy back $750 million of its debt maturing over the next
three years, along with the offering of $1 billion in new
10-year notes.
Alcoa, part of the Dow since 1959, is one of those old standbys,
a favorite for retirees to hold on to and pass to the kids. But
lately, the stagnant stock price since the 2008 meltdown and a
measly dividend of 12 cents a year combined with fiscal 2010
earnings estimated at less than 50 cents a share should serve as
a wake-up call. Aggressive investors might find better places to
park their cash as stocks continue to fight their way out of the
doldrums.
A company such as Alcoa is highly dependent upon the economic
recovery, not just in the U.S., but worldwide. So far, with the
recent gloomy economic forecasts, it could take some time before
investors again take a shine to Alcoa's shares.
Action to Take --> If
there's a weak link in the Dow's representation of the overall
stock market, Alcoa comes closest. It's an old-line manufacturer
struggling to recapture the spirit of innovation for which it
was once known. Erase this one and pencil in other names such as
Apple or Google, which might better portray what is American
"industry" of the 21st century.
Alcoa's short interest, according to second-quarter financials,
is 77.3 million shares, up from 74 million the month before.
There are just over a billion shares outstanding, giving the
stock a short interest ratio of 7.6%. Not many analysts are
showing they're bullish about the company, and as bearish
sentiment grips onto the stock, shorting Alcoa is an option.
-- Ryan Fuhrmann
Contributor
StreetAuthority |
