Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Apple is Too Rich For the Dow Jones Stocks Index

Companies / Tech Stocks May 30, 2012 - 11:24 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleDavid Zeiler writes: Assuming the Dow Jones Industrial Average represents the biggest, most influential companies in America, Apple Inc. (Nasdaq: AAPL) easily qualifies.

With its massive market cap, trend-setting products, and global brand recognition, it is easy to argue Apple belongs as much or more than any of the current tech companies in the index.


In fact, Apple has superseded all of them, particularly Hewlett-Packard Co. (NYSE: HPQ) and Microsoft Corp. (Nasdaq: MSFT).

Yet the Dow Jones has ignored Apple while letting far weaker companies like, Bank of America Corp. (NYSE: BAC)and Alcoa Inc. (NYSE: AA) remain.

So what gives?...

In a nutshell, Apple stock is too rich for the Dow Jones Industrial Average.

Because the Dow Jones is price-weighted, Apple's current $565 share price would simply overwhelm the index.

If included, Apple stock would account for about 25% of the Dow Jones. That's more than double the 11.5% of current leader International Business Machines Corp. (NYSE: IBM).

"It wouldn't be the Dow Jones Industrial Average," Nicholas Colas, chief market strategist at ConvergEx Group told the Associated Press. "It would be the Apple Plus Some Other Stuff Index."

In this case, a price move of just 5% in Apple stock could push the DJIA up - or down - about 200 points.

Looking at it another way, had Apple been added to the Dow Jones in 2009 instead of Cisco Systems Inc. (Nasdaq: CSCO), the Dow would now be over 15,000.

That's well above the Oct. 2007 record of 14,164 and 2,500 points higher than where it stands today.

With that kind of heft, it's no wonder the Dow has shunned Apple.

How the Dow Jones Industrial Average Works
But it's not just Apple. Other Dow candidates trade high in the triple digits as well.

Google Inc. (Nasdaq: GOOG) trades at about $600, Mastercard Inc. (NYSE: MA) at about $400, and Amazon.com Inc. (Nasdaq: AMZN) at over $200.

"A system that worked for over a century may need to be adapted to include higher-priced stocks," Howard Silverblatt, the senior index analyst at S&P, told Barron's. Silverblatt cautioned that such changes "would have to be functional, understandable and maintain the integrity of the index."

That's a sticky issue. When the Dow Jones Industrial Average was created in 1896, it was calculated simply by adding up the closing prices of the 12 component stocks and dividing by 12.

But as stocks were added, and stock splits caused changes in stock prices, a method was needed to ensure such changes would not affect the average.

The answer was the Dow Divisor.

It changes every time the index components change so that when the markets open the next day, the Dow reflects the previous day's close. While something of an anachronism, the Dow's price-weighting and use of the divisor are what makes it unique.

The keepers of the Dow index have no desire to fiddle with this time-honored formula just to accommodate Apple.

"It would be a methodological mess," John Prestbo, the executive director of the Dow Jones Indexes, told Barron's. "You'd have a 29½-stock index."

Prestbo said the Dow has a purpose larger than including every Wall Street darling.

"My job and that of the index committee is to administer the Dow so that it does its job of reflecting the stock market, not to get companies into the Dow that people want," Prestbo said.

Still, the Dow's price-weighting dilemma goes well beyond Apple.

It's already a problem with IBM, which has more than twice the influence (11.5%) of any other Dow component. Meanwhile, the lowest-priced stocks in the Dow Jones, like Bank of America and Alcoa Inc. have almost no impact at all--about half a percent each.

The combination of the DJIA's relatively small sampling of 30 companies and the anomalies of its price-weighted system is why most Wall Street professionals prefer indices like the S&P 500 to the DJIA.

Should Apple (Nasdaq: AAPL) Do a Stock Split?
Given that the Dow isn't likely to change for Apple, could Apple change for the Dow?

Assuming price is the only impediment, Apple could do a 5-to-1 or even a 10-to-1 stock split to get its price into Dow Jones-friendly territory.

But that doesn't seem to be in the cards, either.

Apple last split its shares in 2005. Despite its rapid rise in price, the company has shown no inclination for any kind of stock split.

Apple CEO Tim Cook has repeatedly dismissed the possibility of a stock split, saying in March that "there's very little support that it helps the stock."

And unfortunately for the Dow, Apple isn't alone in frowning upon stock splits. Only 12 companies announced splits last year, compared to 35 in 2005 and 100 in 1997.

With neither Apple nor the Dow's proprietors in an obliging mood, it looks like the DJIA will not be getting any Apple DNA any time soon.

"Everybody is in love with Apple because it keeps defying gravity," Prestbo said. "That doesn't mean the Dow isn't doing its job of reflecting the market. Apple certainly qualifies in every respect except one -- price."

Source :http://moneymorning.com/2012/05/30/why-apple-inc-nasdaq-aapl-is-too-rich-for-the-dow-jones/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in