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Thursday, May 28, 2009

A Look at how Stocks Perform Shortly After Being Added to the Dow

Many have been wondering lately which company will take the place of GM in the Dow Jones Industrial Average, if they happen to file chapter 11. GM has been listed on the Dow since August 31, 1925 (second oldest only to General Electric (GE)). In my opinion, whether GM files chapter 11 or not, getting delisted from the Dow seems inevitable. There are so many other strong American companies that deserve to be in the Dow Jones in place of GM. A short while back I started a contest on my blog to see who could guess the next component of the Dow being delisted. Currently almost 75% of the votes are for GM and the rest for either Bank of America (BAC) or Citigroup (C).

I have been doing some research and I have found that once a company is added to the Dow (last 5 additions) the price of the stock rises on averages 5.16% in the first three months, and 6.58% in the first 6 months of being added to the index. Below are some of the most recently added stocks, the date, (all stocks added the last 5 times the index has changed), and their performance over 3 months and 6 months respectively.

Bank of American (BAC) Feb 19, 2008 -15.28% -28.1%

Chevron (CVX) Feb 19, 2008 +20.07%, +0.78%

Citigroup (C) March 17, 1997 +19.48%, +24.41%

Hewlett-Packard (HPQ) March 17, 1997 -3.83%, +20.98%

Home Depot (HD) Nov 1, 1999 +36.09%, +5.41%

Intel (INTC) Nov 1, 1999 +6.29%, +59.32%

Johnson &Johnson (JNJ) March 17, 1997 +14.68%, -0.65%

Kraft (KFT) Sep 22, 2008 -23.19%, -36.69%

Pfizer (PFE) April 8, 2004 -5.71%, -17.21%

Verizon (VZ) April 8, 2004 -3.14%, +9.36%

Wal-Mart (WMT) March 17, 1997 +11.30%, +34.78%

In my opinion I think Google should and will replace General Motors on the Dow. The majority of the guesses on my blog for the component to be added were for the following (in order from most guesses to least): Apple (AAPL), Research in Motion (RIMM), Google (GOOG), Goldman Sachs (GS), and Visa (V). Although Visa is a great company, I do not think they have a very good chance, as they are not even listed in the S&P 500 yet (soon they will be as their market cap is bigger than both MA and AXP combined).

Whether or not these averages mean anything (stocks being added during bull and bear markets will make a big difference), in my opinion it is a good sign for a company to be added to the index. Time will soon tell how the Dow will be reshuffled.

Please feel free to share your thoughts on which companies are good candidates for the Dow.

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