"Why [is microsoft] languishing...?"
must be the value guy from bloomberg. by the way, goodyear and chevron are two of my put plays.
regards
Boston, Oct. 28 (Bloomberg) -- Everyone but the ghost of
Charles Dow is saying his two cents' worth this week about
Monday's upcoming changes in the Dow Jones Industrial Average.
But I'm going to make a cockeyed prediction that I don't think
you'll hear anywhere else.
Over the 12 months starting Nov. 1, I think the four tired
old industrial stocks that are being discarded from the Dow
industrials -- Chevron Corp., Goodyear Tire & Rubber Co., Sears,
Roebuck & Co. and Union Carbide Corp. -- will outperform the
four glistening stars that are being added -- Microsoft Corp.,
Intel Corp., Home Depot Inc. and SBC Communications Inc.
If this happens, it will surprise the pants off most people.
The editors of the Wall Street Journal, who supervise the Dow
Jones Industrial Average, seek out the cream of U.S. industry.
One can argue about SBC Communications, but few would dispute
that Microsoft, Intel and Home Depot are superb companies. I
doubt that anyone would dare apply that adjective to Chevron,
Goodyear, Sears or Union Carbide.
What's more, many people are aware that the stocks that Dow
Jones added to its average in March 1997 have vastly outperformed
the stocks they replaced. At that time, Hewlett-Packard Co.,
Johnson & Johnson, Wal-Mart Stores Inc. and what is now Citigroup
Inc. were added. From the end of March 1997 through yesterday,
Wal-Mart is up 280 percent, Citigroup 141 percent, Johnson &
Johnson 97 percent and Hewlett-Packard 32 percent.
No Contest
The discards of 1997 were Bethlehem Steel Corp., Texaco
Inc., Westinghouse Electric Corp. and Woolworth Corp. How have
they done? Bethlehem Steel is down 21 percent in a rising market.
Texaco is up 11 percent. Westinghouse acquired the CBS
broadcasting network, changed its name to CBS Corp. and is up 153
percent. Woolworth Corp. changed its name to Venator Group Inc.,
but the name change hasn't helped; the stock is down 68 percent.
Average result: the ``new kids' of 1997 are up an average
of 138 percent. The rejects of 1997 are up an average of 19
percent. No contest.
But not every change results in better performance. Take a
close look at the changes Dow Jones made in 1991. In came
Caterpillar Inc., J.P. Morgan & Co. and Walt Disney Co. Out went
Navistar International Corp., Primerica Corp. and USX Corp.
All three of the additions performed admirably. Two of the
three discards were duds. Yet the third discard, Primerica,
performed so well that collectively the discards have outdone
their replacements over the past eight and a half years.
Primerica's Transformation
Since May 1991, Caterpillar is up 328 percent, J.P. Morgan
134 percent and Disney 164 percent. Among the discards, Navistar
is up a measly 12 percent. USX split into two companies, but
neither has done well. The steel portion, USX-Steel Group, is
unchanged. The oil portion, USX-Marathon Group, has inched up 13
percent. But ah, Primerica. Under the relentless leadership of
Sandy Weill, it transformed itself into Travelers and then into
Citigroup. The stock is up 1,366 percent.
Taken together, then, the additions made in 1991 have
provided about a 209 percent return. The jilted stocks of 1991
have returned about 464 percent, thanks entirely to Primerica.
Why do I think a bunch of has-beens like Goodyear and Sears
can outperform the exciting new stalwarts such as Microsoft and
Intel? For several reasons:
-- The old stocks are cheaper. Goodyear, for example, sells for
16 times earnings, 0.5 times revenue, and 1.7 times book value
(corporate net worth). Microsoft sells for 61 times earnings, 22
times revenue and 17 times book value. In most years throughout
stock-market history (though not last year or this year) cheap
stocks outperform expensive ones.
Favorable Economy
-- The economy is hot. This year's four discards are all
cyclical companies, which rise and fall with the tides of the
economy. And the economy has at least one last hurrah in it
before this cycle plays out, I think.
-- Technology stocks are overdue for a correction. Don't take
my word for it. Ask Steve Ballmer, the president of Microsoft,
who said last month that a ``gold rush' mentality had pushed
technology stocks, including his own, to unwarranted heights.
--The effect of Dow Jones's announcement about the average
change has been to depress the stock of the discards, giving them
an easier starting point, and to enhance the stock of the
additions, giving them a tougher starting point.
If I prove to be right, it doesn't mean that the decision-
makers at Dow Jones have done anything wrong. Their job isn't to
maximize the stock-market performance of the Dow Jones Industrial
Average. Their job is to construct a representative group of
blue-chip companies in a variety of industries.
Of course, with only 30 stocks, the Dow Jones Industrial
Average is too narrow a gauge to be a true reflection of the
overall market. But no other market average has 103 years of
history and lore associated with it, and no other one holds the
public's interest as tightly. For that reason, what happens to
the Dow industrials can influence investor confidence -- and
thus, indirectly, the whole stock market.
--John Dorfman (617) 964-2026 through the New York newsroom./cws
¸1999 Bloomberg L.P. |
