Deconstructing the Dow

Here’s you scary stat for the day. GM’s book value is -$72.50 per share. Going by the Dow’s current divisor, that means GM’s is worth nearly -600 Dow points.
Let’s be honest, the Dow Jones Industrial Average (^DJI) is a lousy index. It’s a price-weighted index of just 30 stocks. Combined, the 30 stocks are worth $3.7 trillion, which is less than one-third the value of the cap-weighted S&P 500 (^GSPC). I know the Dow is 112 years old, and it was great in its day, but the time has come for the old boy to retire.
Caterpillar (CAT), for example, is a $74 stock, which makes it the fourth most heavily weighted stock in the Dow. Yet, it’s $45 billion market value ranks 25th — and CAT is hardly the worst offender. That title belongs to what was once called General Motors (GM). If you’re not familiar with GM, it’s a health care benefits management firm that sells cars for a loss as a side venture.
GM’s price weighting is just 0.81% of the index, but it’s market value is a puny 0.18%. That means that GM has over 4.5 times weighting than it should have. Would anyone miss this is it were gone? I doubt it. Barry says replace it with Cisco (CSCO). That’s not bad, but I’d prefer UPS (UPS).
Here’s a listing of all the Dow stocks and their Share Weight, which is how much each stock makes up in the DJIA, along with each stock’s Market Cap Weight, which would be how much each stock would be worth if the Dow were weighted by market value.
Symbol……………..Share Weight……Market Cap Weight
AA…………………….2.51%…………………0.78%
AIG……………………2.00%…………………1.91%
AXP……………………2.76%…………………1.23%
BA…………………….4.85%…………………1.40%
BAC…………………..1.76%…………………3.01%
C……………………….1.26%…………………2.53%
CAT…………………….5.28%……………….1.24%
CVX…………………….6.92%………………..5.49%
DD……………………..3.04%………………..1.05%
DIS…………………….2.24%…………………1.64%
GE…………………….1.89%…………………7.20%
GM…………………….0.81%…………………0.18%
HD……………………..1.75%…………………1.14%
HPQ……………………3.18%…………………3.00%
IBM…………………….8.61%…………………4.53%
INTC……………………1.53%…………………3.10%
JNJ……………………..4.57%…………………4.93%
JPM…………………….2.58%…………………3.39%
KO………………………3.78%…………………3.37%
MCD…………………….4.01%…………………1.74%
MMM……………………4.99%…………………1.35%
MRK…………………….2.57%…………………2.12%
MSFT…………………..1.97%…………………7.04%
PFE…………………….1.22%…………………3.16%
PG………………………4.43%…………………5.18%
T…………………………2.38%…………………5.42%
UTX……………………..4.46%…………………1.66%
VZ……………………….2.44%…………………2.66%
WMT…………………….4.04%………………..6.11%
XOM……………………..6.14%……………….12.44%
General Electric (GE) is the stock that’s punished the most. The Dow weighs it about one-fourth of what it should be.
And don’t get me started on the Nasdaq!

Posted by on June 27th, 2008 at 7:13 am


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