By CCN: The Dow Jones Industrial Average was originally designed as a stand-in for the broad U.S. economy. In theory, the 30 stocks that compose the Dow Jones Industrial Average represents the influence of various sectors over the economy, with each stock representing a major player in a given sector.
Yet the Dow Jones Industrial Average has changed very little in the past 20 years. Four stocks were jettisoned in 1997, and four more in 1999. The most recent swap was shoving out General Electric in favor of Walgreens Boots Alliance.
The problem is that some of the other stocks in the Dow Jones Industrial Average really don’t belong there. That’s because they have lost their influence over the economy and are no longer representative of the most forward-thinking of the lot.
Kick out the Old, Bring in the New
General Electric got kicked out in 2018 because the company had fallen on such hard times, despite the fact that it is a diversified conglomerate with $120 billion in annual revenue.
That’s why the Dow Jones Industrial Average should kick out these companies, and the choices will surprise you.
Say goodbye to Johnson & Johnson (JNJ), Merck & Co. (MRK), and Proctor & Gamble (PG). That’s right, these three healthcare/consumer stocks need to go.
JNJ and PG are moribund companies slated to grow earnings only 6% annualized over the next five years. MRK is slated to grow earnings at 9% over the next five years and is overvalued.
While one might argue that MRK should be left in with that growth rate, Pfizer is reinventing itself and covers the same arena as MRK.
Focus on New Technology, DOW
JNJ stock and PG stock should be replaced with Celgene and Biogen, two biotechnology companies with exceptional portfolios, forward-thinking management, and are in a sector that will be hot for the next two decades. Celgene has a 17% growth trajectory, and Biogen has several hot products in its pipeline.
MRK can be replaced by the one gigantic advertising play that is still not in the Dow Jones Industrial Average: Alphabet (GOOGL). With a 90% market share in search, it’s a crime for GOOGL stock to be ignored like this.
Why is IBM still in the Dow Jones Industrial Average? IBM stock has been a laggard for years, with products and management that seem rooted in the 1980’s. Its earnings have stalled and 3% annualized growth is unimpressive.
Leaving out Berkshire Is a Crime
The obvious replacement is a long-ignored conglomerate that is itself a cross-section of the American economy: Berkshire Hathaway. BRK stock is one of the most followed names in the market, and is always relevant, thanks to Warren Buffett.
BRK stock itself is composed of GEICO Insurance Company, and consists of over 60 other companies across every sector. It also has minority holdings in dozens of other companies in the market. BRK stock could be its own index.
Finally, it’s time to jettison Walmart. WMT is yesterday. $500 billion in annual sales is meaningless with 3% earnings growth. While Walmart is unquestionably a juggernaut in the world of retail, it has sat on its laurels for too long. Brick-and-mortar means looking backwards, not forwards.
The obvious replacement is Amazon.com. AMZN is not only a retail business, but one that is also a distribution business, and also has a huge cloud computing presence that makes up for the loss of IBM from the DJIA.
These five companies alone make the Dow Jones Industrial Average nearly obsolete.
As for Boeing, it remains as relevant as ever. The 737 MAX issues are temporary, yet Boeing remains a leader in aerospace and one of only two major airplane manufacturers.
The other 24 stocks? I’ll let them stay.