“You have three stocks that are hardly weighted at all and you’re adding three that are coming in with major weight -- it’s a pretty big change,” Richard Moroney, editor of Dow Theory Forecasts newsletter who manages $180 million at Hammond, Indiana-based Horizon Investment Services, said in a phone interview. “Does it make it more representative? Yes.”
IBM has more than doubled since the bull market in U.S. equities began in March 2009, a period in which it has always been the highest-price stock in the Dow. Because of the weighting, IBM’s performance has sometimes meant the difference between a gain or loss for the whole average.
On April 19, when IBM shares tumbled 8.3% after profits fell short of analyst estimates, the Dow trailed the S&P 500 by 0.8 percentage point, the most since December 2008. IBM’s loss cut 132 points from the Dow that day, erasing almost all the gains from other members. When the S&P 500 ended 2011 virtually unchanged, IBM’s 25% rally contributed almost half of the Dow’s gain for the year, driving the 30-member gauge up 5.5%.
While Visa and Goldman will help limit IBM’s influence, some of the most heavily traded technology stocks in the country are effectively ineligible for the Dow because of prices so high they would distort the gauge, Blitzer said.
Apple Inc., whose shares closed yesterday at $494.64, has the biggest weighting in the S&P 500 because its market value is $449.4 billion, the largest in the world. Google Inc., whose stock trades at $888.67, has a capitalization of $296.1 billion and is the sixth-biggest weighting in the S&P 500, according to data compiled by Bloomberg and S&P.
“Clearly, Google and Apple are huge companies, very big and very well known, and there’s no question that they’re very important to the U.S. and the global economy,” Blitzer said in a conference call with reporters. “The prices of their stocks are so high that putting Google in would completely distort the index and it wouldn’t work.”
More U.S. companies may be priced out of the Dow as stock splits have become less common and the number of shares trading above $100 reached a record. Eleven companies in the S&P 500 have split their stock this year, compared with 42 annually since 1996, data from S&P show. That helped send the average share price to $65.96 last quarter, the highest on record.
Goldman Sachs climbed 3.5% to $165.14 yesterday. Beaverton, Oregon-based Nike jumped 2.2% to $66.82 and Visa in Foster City, California, increased 3.4% to $184.59.
Palo Alto, California-based Hewlett-Packard lost 0.4% to $22.27 and Alcoa in New York slipped 0.3% to $8.06. Bank of America in Charlotte, North Carolina, added 0.9% to $14.61.
The Dow average climbed 35.14 points, or 0.2%, to 15,226.20 as of 10:23 a.m. today in New York.
The gauge was devised in 1896 by Charles H. Dow, co-founder of Wall Street Journal publisher Dow Jones & Co. It originally included General Electric Co., American Tobacco and 10 other companies before expanding to 20 companies in 1916 and 30 in 1928.