Seven Stocks Everyone Should Know About
"Here are seven stocks you need to know about today!"
How many times have you read, seen, or heard that?
Seems like I see it all the time. Let me back up and tell you why I have the nerve to say something so cliché: Clearly my point is almost the opposite of what the headline makes it out to be. My point has something to do with "relax."
The Dow Jones Industrial Average is quoted all the time on television and in print. And many times recently the news is that the Dow is at all-time highs. As with many things in life, a little bit of knowledge goes a long ways towards understanding what drives the news. In this case, it's important to understand what makes up the Dow's record-setting performance this year.
The Dow is comprised of 30 stocks. Created by Mr. Dow in 1896, the Dow Jones Industrial Average had only 12 stocks and now it has 30. At its creation, the Dow was 63. Today it is around 18,500 and a typical daily movement is more than 60 points. Recently, the Dow was up around 1,000 points and 97% of that gain comes from only seven stocks: 3M, IBM, United Health, Johnson & Johnson, Caterpillar, ExxonMobil, and Chevron. (1, 2)
Just because the Dow is quoted as reaching all-time highs does not mean that all, or even most, stocks are also at their highs. In fact, most of the 30 stocks in the DJIA are at least 7% away from their all-time highs, as of the time of this writing. (1)
Dow is a "price-weighted" creation. Stocks with higher prices move the index more than stocks with lower prices. Price-weighting has strange ramifications. If you have $100,000 and divide by today's Dow value, you'd have approximately the same weight in each of the stocks as the Dow average. But why would you want that? What does that have to do with your financial plan?
Price-weighting also gives a lot of weight to stocks that are not necessarily larger or better than any other in the Dow. A higher price per share of a company does not necessarily mean that the company is worth more than any other company. A company could announce a stock split, two shares for one, and bring the price down. Then that company would have a much smaller influence on the Dow compared to other companies. Conversely, a company could do a reverse stock-split, reducing the number of shares in the market (say by one-half) and increase (double) the stock's influence on the Dow.
Taken to extremes, a company could have one share of stock worth the entire market value of the company and then completely dwarf the others on the average. At the other extreme, a company could reduce the price of its stock to "penny stock" by issuing (close to infinite) shares, making its influence on the Dow infinitely small.
Being a member of the DJIA is prestigious for corporate management. It's like a country club. The movers with the higher stock prices carry a little more bragging rights at the 19th hole.
None of this helps us with our retirement income planning. So why are we paying attention to the news? When anyone talks about the Dow, ask yourself, so what does that have to do with the price of beans (or rice, or milk, or my water bill)?
The seven stocks everyone should know about might be great companies and may deliver exceptional value for their investors. And they've led their 30-some friends to the end of the golf course with a respectable score this year. If you have a stock portfolio, you might have a few stocks that are shooting the lights out and a bunch of others "coming along for the ride." Next year, this may change, we just don't know how.
1. DJIA Today: http://finance.yahoo.com/quote/%5EDJI/news?p=^DJI
2. DJIA history: Convergex Morning Briefing, Tuesday, July 26, 2016, "Ice, Ice Baby."