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.