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Summary:

A provocative story from Reuters Monday ruminated on which companies are likely to replace Citigroup and General Motors in the Dow Jones Industrial Average. Its conclusion: Google and Cisco are the most likely contenders, with Apple and Visa as less likely candidates. It’s a safe bet that those two troubled companies — trading below $2 a share — will get the boot, but does Google belong in the Dow? I think it does for a few reasons.

A provocative story from Reuters Monday ruminated on which companies are likely to replace Citigroup and General Motors in the Dow Jones Industrial Average. Its conclusion: Google and Cisco are the most likely contenders, with Apple and Visa having a less likely chance.

It’s a safe bet that those two troubled companies — trading below $2 a share — will get the boot, potentially along with Bank of America, which is trading below $4. All are plagued by concerns that bankruptcies or government takeovers would wipe out shareholders. Talk of a reshuffling of the Dow has been heating up of late.

Does Google belong in the Dow? I think it does for a few reasons. According to Dow Jones’ explanation of the indexes composition, “a stock typically is added only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average.”

Sure, the stock closed below $300 a share Monday. But Google (and tech stocks as a whole) have been holding up relatively well during the selloff. The infotech sector of the S&P 500 has fallen 38.4 percent in the last tumultuous six months, compared to the 44.7 percent drop in the S&P 500 itself. Google, meanwhile, is down 30.5 percent.

Second, there aren’t a lot of better alternatives around. The Wall Street Journal editors who oversee the index usually try to replace an exiting stock with one from the same industry. Picking the wrong company can be embarrassing. In April 2004, they chose AIG, then pulled it last September.

Wells Fargo has been mentioned as a candidate, but it was yanked Friday from a Dow index focusing on high-dividend stocks. Visa and Goldman Sachs are possibilities, but may too closely mirror existing components American Express and JP Morgan. Apple is a good candidate, but its 45-percent drop in 6 months and questions about leadership may work against it for now.

Finally, Google and Cisco are strong large-cap stocks that point to where economic growth may lie in the future. The changes in the Dow over recent decades track a long-term, sometimes painful transition of the U.S. economy from manufacturing to services. Only 19 of the Dow’s 30 stocks are primarily concerned with making things you can touch. So losing General Motors and adding in Cisco — which makes the network fabric on which so many new services are appearing — makes sense.

But the economy is seeing another major transformation, a wrenching and sudden one. Economic growth is moving from what I’d call artificial value — iffy financial products that create vast wealth but have little connection to our lives — to real value — applications and services that are changing how we work, how we think and how we stay in touch with others. That model of value has a ways to go, and right now Google represents it best.

In 1896, at the previous turn of the century, Charles Dow upgraded what was largely a railroad-stock index into one more broadly representative of the U.S. economy, tossing out the likes of Union Pacific and adding in U.S. Rubber (now Michelin) and General Electric (the sole remaining founding member). In doing so, he positioned the Dow Jones Industrial to become the most closely watched stock index in the world.

Now, 112 years later, the index’ overseers have a similar chance to make the index better reflect a new century. Adding in Google and Cisco would be a good start.

  1. Wateva they do.. it aint gonna help, as of now.

    After a few months everything will be back on track.

    All this recession is just artificially created bubble, which has to burst sooner or later.

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  2. Sounds like window dressing for the Dow, if you asked me.

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  3. After the crisis is always a growth.
    The share price has always increased and decreased to normal, but when the puzzle.
    Good luck!

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  4. “demonstrates sustained growth”

    10 years of results does not demonstrate sustained growth.

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  5. Sure it is, Austin.

    With the stranglehold they have over online advertising dollars, Google is going to be solid for a long, long time to come.

    That said, I don’t think should be added to the DOW. Other software giants, techs have done fine on the NASDAQ. The DOW is gonna get worse before it gets better, and I don’t really think it would benefit Google tremendously to start taking trades there amid one of the biggest sell-offs in history.

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  6. @austin and @michael. According to Dow Jones, Charles Dow’s original vision for the was pretty simple. “He compared his average to placing sticks in the beach sand to determine, wave after successive wave, whether the tide was coming in or going out. If the average’s peaks and troughs rose progressively higher then a bull market prevailed; if the peaks and troughs dropped lower and lower, a bear market was on.” http://www.djaverages.com/?view=industrial&page=overview

    Google is still very young and has a relatively short history of growth. It could slow down, but so could Microsoft, Intel and IBM. But which tech stocks do a better job of being one of those sticks in the sand today? Google has, to use a different metaphor, been a bellwether stock ever since it went public. I suspect the WSJ editors would agree with your more cautious views, but I just think Google would make the average show more accurately what’s changing in the economy.

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  7. I agree that Google is holding up well during this massive selloff. Now actually the entire market itself has not started the next leg down seriously.

    There is time for serious market crashes. Then what will happen to Google. It too will lose its market capital value. Percentage wise it has done well. We cannot compare Google with Citigroup which is a penny stock only knowing how to burn cash of the poor people.

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  8. I don’t want to come across as diminishing the significance of Google’s achievements, but it will probably come across that way regardless. I would say leave them out of the Dow.

    The DJIA should be our industrial anchors that make up our economy. If Google disappeared tomorrow, would the world still survive if we all had to search using live.com or yahoo.com? I think so. Can’t really say the same for Cisco as they have a tangible product embedded into virtually every corner of the world and is powering virtually every type of business.

    Cisco seems to make a lot more sense than Google as a Dow component…. although Google’s clever innovations are admittedly much more interesting and fun to play around with. Maybe revisit Google in 5-10 years, after a lot of their incubations have had time to succeed or fail.

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  9. Great points, Chris. But let me add a couple of things.

    The things that Google is good at – search, video, “organizing information” – can be done by other companies, but those things are important to the economy and not represented in the Dow right now. Adding Yahoo doesn’t make sense, nor does letting live.com hold the search banner when it has such a puny market share.

    If American Express or Disney or McDonald’s disappeared, I suppose we’d muddle along okay as well. But how would most of our individual lives be affected if Google went away and took its share of the cloud (and the stuff we keep there) on it? For me, it would be more noticeable than not having a McFlurry.

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  10. [...] Read the rest of this post Print all_things_di220:http://voices.allthingsd.com/20090311/should-google-be-added-to-the-dow/ SHARETHIS.addEntry({ title: “Should Google Be Added to the Dow?”, url: “http://voices.allthingsd.com/20090311/should-google-be-added-to-the-dow/” }); Sphere Comment Tagged: Google, Internet, Voices, econalypse, Apple, Bank of America, bankruptcy, Citigroup, Dow Jones Newswire, GigaOm, government, investors, Kevin Kelleher, Reuters, shareholders, stock, user-generated content, Visa | permalink [...]

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