CNN Money’s Paul La Monica had an idea that I initially thought was preposterous: add Apple to the Dow. For those of you that don’t know what the Dow is, it’s the Dow Jones Industrial Average, the most well recognized stock market index on the planet. I’ve talked before about why I hate the Dow because it’s a price-weighted index and only contains 30 stocks. But I also conceded that the Dow is also important since so many people care about it. Back to La Monica, I thought this idea was ridiculous but in the name of not being one-sided I read the post anyway. He makes very good points: Apple is worth more than many firms already listed on the Dow, in fact it’s larger than all but 2 of the 30 stocks (Microsoft and Exxon). Ranking firms based on estimated revenue, Apple is also right in there with the big boys.
All great arguments. There are already 5 tech firms listed on the Dow but La Monica thinks a 6th is warranted considering the shift of the economy towards technology and services. I could buy that. The S&P 500, which contains 470 more stocks than the Dow, has about a 20% weighting in technology so adding Apple would give the Dow a 20% weighting (based simply on # of companies listed). I read La Monica’s pitch and was almost about to buy into it, but then I caught a case of the common sensies.
So here’s the problem with Apple: actually there are a lot of problems.
- Apple is too sketchy for the Dow. The Dow is reserved for Blue Chip companies. Companies largely at the top of their industries. Profits come from simply doing what they’ve been doing, and not really from the pursuit of growth. Apple is a growth stock, with price appreciation coming from expected future growth in profits by chasing growth opportunities. One could argue Microsoft is the same way, but it’s a weak one.
- All the stocks in the Dow pay a dividend. The exception is Cisco, which was a recent addition to the Dow. Cisco deserves to be in the Dow because no IT company dominates their industry the way Cisco does. They are also not a growth stock, their price has done absolutely nothing in almost 6 years. In the same time frame Apple is up something like 2300%, and no I didn’t pull that number out of my ass.
- Steve Jobs. Steve is a brilliant man. One of the two Steves to start the company and its current visionary and CEO. Jobs is known to be a hardass and borderline crazy when it comes to product development. Those in the business community know that the type of drive, charisma, leadership, and testicular fortitude it takes to be as successful as he is comes around rarely. When Jobs had a liver transplant the media went crazy over his health because everyone knows that without Jobs the company is toast. When Jobs wasn’t in charge of Apple back in the 90s the company became borderline worthless. Every company on the Dow has successfully transitioned leadership to someone other than its founder. Do you think Proctor or Gamble still run Proctor and Gamble? No! They’ve each been dead for more than 100 years. Steve Ballmer, CEO of Microsoft, is almost a founder, but he was specifically hired as the 24th employee because they needed someone with business skills to run the show. No one knows whether or not Apple can exist without Jobs, and until he’s gone Apple won’t be in the Dow. Jobs is only 55 now so unless he has additional health issues (I certainly hope not) Apple won’t even be considered for the Dow for a while because Jobs won’t dare leave.
- The competition. Why has Apple done so well? It comes down to seeing a market opportunity and cell phones and dominating. What was the market opportunity? In 2005 the cell phone industry was slowly progressing. We got bluetooth, MP3 tones, and color screens. Apple knew you could do better. In 2007 when the iPhone came out the industry hadn’t changed much. Ever since all the cell phone manufacturers have been scrambling to catch up. Eventually they will.
But the biggest problem with Apple and the Dow needs to be separated from the rest because it’s different. It has to do with how the Dow is calculated. You didn’t click the link at the top to see what a price-weighted index is did you. Of course not. Price-weighted indexes are weighted not on the value of the company, but the price of the stock. See the example below:
- Stock A is worth $500 and has 1,000 shares so the company is worth $500,000.
- Stock B is worth $50 and has 1,000,000 shares so the company is worth $50 million.
Which of these two stocks should have more weight in an index. The one worth more right? In the S&P 500 that would be true, because (for the most part), it’s a market cap weighted index. The Dow is price weighted. If Stock A and B were both in the Dow, Stock A would be deemed 10 times more important than stock B. Hardly an accurate reflection of which firm means more to the economy.
What does this have to do with Apple? Their stock closed at $270 on Friday, April 23. The current high price in the Dow is IBM which closed at $130, less than half that of Apple. The next closest isn’t even over $90 (as of 4/23). If Apple was added to the Dow, it would immediately become the most important stock in the economy, by a large margin.
Apple is a great company and I love their products. With more disposable income I’d probably own a lot more of them. They’re important to discretionary spending, information technology, and the mobile phone industry. But they don’t belong in the Dow. Even if they were able to overcome all the obstacles outlined in the bullets, they’d need to split their stock 1:3 (turn one share into 3 with a value of $90 each) before they should be considered for the Dow. Sorry La Monica.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
