Markman: Adding Apple Could Lift the Dow

by Jon Markman | May 12, 2011 12:00 pm

Prices always move against the majority at risk, which means they migrate toward surprises. Two of the biggest surprises in the week before the Bin Laden news were the moonshot by Intel (NASDAQ:INTC[1]) and the continued strength among major health care stocks, and particularly Big Pharma. And thanks to the heavy pull of Intel’s $125 billion market cap, the semiconductor leader has managed to pull up indexes like the Dow that it plays a role in.

That’s just one more reason it’s important to rethink the old nature of these indexes and lean more towards tech heavyweights like Intel — or put bluntly, a reason to finally make Apple Inc. (NASDAQ:AAPL[2]) a Dow component to give the index a jolt.

 

First, take a look at the monthly, 10-year chart of Intel (above) as a case study. You can see that in the past month the stock touched the bottom of its uptrend — in the week before it announced earnings — and then surged to close at a three-year high. That high is just peeking over the top of its 10-year downtrend.

Think about it: Intel has been growing steadily for 10 years but shareholders have been getting no credit for it because the price/earnings multiple has been shrinking. Our thesis now is that companies deemed to be part of a global Nifty 250 will start to see multiple expansion as underinvested pension funds focus on proven, undervalued winners that won’t embarrass them.

This has major implications for the Dow Jones Industrials and the S&P 500, of which Intel is a big part. The heaviness of the tech goliath’s $125 billion market cap has been a drag on the indexes for a decade. If it continues to levitate now, it will supply one more key to unlock the hidden value of these major market benchmarks.

This is important because it is not occurring in isolation. Until the autumn of last year, large-cap energy companies ExxonMobil (NYSE:XOM[3]) and Chevron (NYSE:CVX[4]) were holding the indices back, but after an incredible turnaround in the fall, even preceding the ramp in crude oil prices, these two companies are now cruising at all-time highs and are likewise much more of a lift than a drag.

Then add in the new multi-year highs for Dow component Bristol-Myers Squibb (NYSE:BMY[5]), which had been malingering, as well as the recent romps by Dow component Pfizer (NYSE:PFE[6]) and American Express (NYSE:AXP[7]) — and the massive new highs in the past two weeks for Dow components DuPont (NYSE:DD[8]), Travelers (NYSE:TRV[9]), IBM (NYSE:IBM[10]), Caterpillar (NYSE:CAT[11]), Kraft (NYSE:KFT[12]), Coca-Cola (NYSE:KO[13]), Verizon (NYSE:VZ[14]) and Disney (NYSE:DIS[15]) — and suddenly it looks like something impressive is happening.

A 30-stock index needs most of its oars in the water, rowing in the same direction, to make progress. Until recently, the Dow had been behind the pace because its sectors were all pulling in different directions. Drugs and energy had been a terrible drag, with tech and retail not far behind.

But now drugs, heavy industry and energy are in synch, and retail, in the form of Home Depot (NYSE:HD[16]), is coming along.

That leaves three dreadful tech pieces — Microsoft (NASDAQ:MSFT[17]), Cisco (NASDAQ:CSCO[18]) and Hewlett Packard (NYSE:HPQ) — as the main anchors, followed not far behind by stumblebums Alcoa (NYSE:AA[19]) and Bank of America (NYSE:BA[20]).

The managers of the Dow Jones average would love to see it ring up new highs this year or next, so they will probably pull some strings. The most immediate boost they can give the index would be to kick out a couple of its smaller laggards and replace them with something fiery. So my expectation is that they will soon yank Alcoa, which has the smallest market cap, at $18 billion, and replace it with Apple (NASDAQ:AAPL[2]), whose market capitalization is second only to ExxonMobil and clearly deserves to be a part of the country’s financial benchmark.

The cagey thing about adding Apple is that the Dow is a price-weighted index, rather than market cap weighted, and Apple would instantly have the highest price weighting, at $350. The next largest price in the index at present is IBM, at $170. This would mean that every dollar that Apple moves up advances the index by up to 10x more than the rise of a dollar of Alcoa, priced at $17.

The bottom line is that the renewed strength of Intel and fellow former laggards, in conjunction with the likely addition of Apple, may well help push the Dow Jones Industrials much higher this year than the consensus believes possible.

For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage,[21] or his long-term investment service, Strategic Advantage[22]

Source URL: https://investorplace.com/2011/05/markman-adding-apple-could-lift-the-dow/

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