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In terms of market cap, the average Dow stock today is ranked 37 overall, compared with 43 in 1986. As the table shows, the Dow stocks of today are less marginalized than their brethren of 14 years ago. Put another way, the smallest of today's Dow stocks are found higher in the list of company size than they were in 1986.
Thanks go to Elan Caspi for supplying some of the data used in this article. Also, many have written me wondering when the new Beating the S&P 30 stock list is coming out. If history is any guide, the new annual Business Week listing from which we compile the BSP 30 list should be published in the next week or two. Stay tuned for more information. We'll update the list as soon as possible at the Foolish Buy Calculator site.
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Some believe that the recent Dow shortfall may relate to the relatively static nature of the Dow, whose component companies just can't keep up with the tremendous changes in the economy that have occurred over the past decade. Since the Dow stocks change relatively infrequently -- on average substituting less than a dozen stocks per decade -- maybe the Dow can't keep pace with this economic tidal wave. Have too many of the Dow stocks become marginalized, dangerously close to fading into oblivion?
Foolish Four (and Beating the S&P) investors seek to buy world-class companies that have temporarily fallen on hard times, but have the resources to regroup and charge up the hill again. Has today's Dow has become swollen with companies that are so small, relative to others in the markets, that they can't right themselves when things go wrong? For example, former Dow components Sears <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: S)") else Response.Write("(NYSE: S)") end if %> and Goodyear Tire <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GT)") else Response.Write("(NYSE: GT)") end if %> have taken a dive right before our eyes and may never be heard from again.
Are there simply too many companies like Sears and Goodyear in the Dow for the Foolish Four to work? Have the surging "new economy" stocks made the Dow a less representative grouping of the largest stocks? Is today's Dow packed with too many weaklings that are destined to fall even farther? Questions, questions...
Let's compare the composition of the current Dow to those of Dows past. One way to determine a company's relevance in the marketplace is to look at its market capitalization. Market capitalization, or "market cap," is calculated by multiplying the current price of a company's stock by the total shares outstanding. Market cap represents the marketplace's current estimate of the worth of any given company, which theoretically takes into account all known information about the company, including future prospects. If the Dow stocks are becoming increasingly irrelevant, the relative market cap of the Dow stocks, compared to other stocks, should be falling.
I've chosen 1986 as the year to make our comparisons, mainly because it's the earliest year for which I had readily available data. A comparison with 14 years ago also seems a reasonable time period, before such "new economy" companies became the rage. In 1986, Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> was valued at $3 billion (compared to $404 billion today) and ranked 145 in terms of market cap, just one ranking ahead of Sara Lee <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SLE)") else Response.Write("(NYSE: SLE)") end if %>. Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %> and Cisco <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CSCO)") else Response.Write("(Nasdaq: CSCO)") end if %> were nowhere to be found on the list. (If we had only known then what we know now! Audible Sigh.)
Just how do today's Dow stocks compare with those of 1986 in terms of relative market cap? One way to assess the situation is to see how the average Dow stock compares to the most highly valued company in the marketplace.
The average (i.e., median) market cap for today's 30 Dow stocks is $74 billion, compared with $497 billion for Microsoft <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MSFT)") else Response.Write("(Nasdaq: MSFT)") end if %>, the company with the highest market cap. Thus, the average Dow company today is worth about 15% of the largest company.
Back in 1986, the median market cap for the Dow stocks was a relatively paltry $9 billion. The largest company then was IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>, with a market cap of $92 billion. The average Dow company in 1986 was worth about 10% of the largest company.
So, compared to 1986, today's average Dow stock actually has a higher market cap relative to the largest company.
Let's look at the Dow market capitalizations in a slightly different way. The next table shows how the Dow stocks rank, in comparison with all companies, in terms of market cap. To get this data, I ranked the 30 Dow stocks from largest to smallest. Then I looked at where each of these stocks fell, in terms of market cap, compared to all other U.S. companies. For instance, recently Hewlett-Packard <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: HWP)") else Response.Write("(NYSE: HWP)") end if %> was ranked as the 10th largest Dow company in terms of market cap, but was 15th overall in the marketplace, behind non-Dow companies like Cisco, Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ORCL)") else Response.Write("(Nasdaq: ORCL)") end if %>, and Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %>.
Overall Market Ranking
Dow Stock (Size) 1986 2000
5th Largest 5 8
10th Largest 14 15
15th Largest 41 35
20th Largest 110 67
25th Largest 213 113
30th Largest 725 199
This data came as a surprise to me, and would seem to refute the argument that the stocks in the Dow are more irrelevant than they used to be, at least if one uses market cap as a yardstick. Looking back over the years, the Dow always had its share of relatively small companies. In 1986 American Can, Woolworth, Owens-Illinois <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OI)") else Response.Write("(NYSE: OI)") end if %>, and Navistar International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NAV)") else Response.Write("(NYSE: NAV)") end if %> were Dow components. The Foolish Four strategy performed well then, returning about 30% compared to 18% for the S&P 500. Although the Dow has hit some rough spots this year, it doesn't seem that the mere size of its companies is a major contributing factor.
NOTE: The BSP returns will return next week after Ethan gets his brand-new, super-duper, screamingly HOT computer actually working.