Apple (AAPL) is completing its journey from renegade to matron with the announcement that it will be joining the Dow Jones Industrial Average, on March 19, taking the place of old Ma Bell, AT&T (T).
The move was prompted by a 4:1 stock split by Visa (V) which would have reduced the weighting of information technology in the price-weighted index. The addition of Apple is designed to minimize this impact while allowing telecoms to be represented by Verizon (VZ).
It’s hard not to see this as a play by the index committee at S&P Dow Jones to gussy up the storied measure of the stock market in light of the Apple-fueled blitz back to dot-com highs by the Nasdaq Composite. David Blitzer, chairman of the index committee, confirmed the news that was first rumored last April when Apple announced a 7:1 split.
Apple will be joining the Dow Jones Industrial Average on March 19.
So is this good news for Apple? Not really. Historically, the managers of the Dow have done a pretty terrible job of selecting tech stocks. They have almost always been very late to every move.
Just look at the recent track record. They dropped Hewlett-Packard (HPQ) in September 2013. The stock bottomed a month later and went on to more than double into a high set in January. They dropped Alcoa (AA) at the same time, which pretty much went vertical immediately afterwards and doubled in value.
To be fair, the stocks they added at the time performed pretty well, with Nike (NKE) and Visa (V) both gaining about 40 percent or so. But the ones they dumped did better.
It’s also interesting to note that this isn’t the first time the Dow has mugged AT&T. It was originally added on March 4, 1939, replacing IBM (IBM) and Nash Motors, famous for the Nash-Healey sports car and eventually rolled into American Motors upon the acquisition of the Hudson Motor Co. before the nameplate was phased out by George Romney, the father of Mitt Romney.
AT&T was also dropped on April 8, 2004 (along with Eastman Kodak and International Paper (IP)) in favor of AIG (AIG), Verizon, and Pfizer (PFE).
The new AT&T traces its lineage to SBC Communications (one of the “Baby Bells”), which renamed itself AT&T after buying the original AT&T in 2005. SBC was added to the Dow on Nov. 1, 1999.
The move has its defenders. The Wall Street Journal noted that technology is still underrepresented in the index with just four true tech companies — Cisco (CSCO), IBM (IBM),Intel (INTC), and Microsoft (MSFT) — comprising a 10 percent weighting vs. a 20 percent weighting in the S&P 500. And the National Science Foundation estimated that “knowledge and technology intensive” industries were responsible for 40 percent of U.S. GDP.
Apple’s management were surely cognizant of all this when they announced the stock split. By doing so, they ensured Apple would be added to the Dow 30 to the benefit of existing shareholders, who gain from the added buying demand that will now flow in from passive, index-focused investors. Other large-cap tech alternatives, such as Google (GOOG) and Amazon (AMZN) have share prices that are too high and would’ve skewed the price-weighted Dow.
On Monday, the company announced a release date for the Apple Watch. My skepticism on the Apple Watch specifically and smart watches in general is well documented. This could very well be the company’s first high-profile flop in a long time.
People stopped wearing watches when smart phones came along, and show no sign of going back to the superfluous technology. Bespoke Market Intelligence notes that buzz has quickly died down already. Those in the $200k+ income category were the most likely to buy an Apple Watch, but have clearly lost interest in recent months.
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Demographics aren’t looking good either with women the primary users of iPhones (53 percent of total) vs. men (47 percent of total) yet women have been much less interested in the Apple Watch than men are. And the interest level among men has been dropping rapidly, falling by two-thirds among 18-to-24 year old men since November.
Disappointment with the Apple Watch could mesh with the potential for a rocky path forward for most Dow newcomers. An analysis of data by Bespoke shows that of the stocks added to the Dow since 1999, on the median they have lost 5.1 percent over the next three months and managed a feeble 0.9 percent rise one year out. The contender from Cupertino could well buck the trend, but for now the odds are against.
Best wishes,
Jon Markman
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