The inclusion of Alphabet Inc (NASDAQ:GOOG)(NASDAQ:GOOGL) in the Dow Jones Industrial Average has changed the makeup of the popular index with its weighting much higher than its predecessor Verizon (NYSE:VZ). Here’s what one market expert says about the index’s makeup and which stock could be next to get the exit sign.
Why Alphabet Makes Sense in Dow Jone Industrial Average
Freedom Capital Markets Chief Market Strategist Jay Woods is a fan of the Dow Jones Industrial Average and tells Benzinga he has a lifelong goal of being part of the conversations that take place of picking the member of the index.
Woods agrees with the recent addition of Alphabet as a communications stock replacing Verizon.
While some would argue that Alphabet is more of a tech stock, Woods makes sure to highlight that the stock is classified as a communications stock, the same sector that Verizon is in.
"They’re very specific what they take out and that it’s replaced by someone within the same sector," Woods tells Benzinga.
Woods says Verizon was a $34 stock when it went in the index and it was $41 when it came out 20 years later.
"Thanks for the dividend. Thanks for the memories."
The market expert says adding Alphabet is more representative of the sector and economy.
Woods calls the Dow Jones Industrial Average the "premier index in the world" and said the change is good.
What Stock Could be Next to Exit Dow Jones Industrial Average
As for which of the Dow’s 30 components could be next to go, Woods has one stock in mind.
"You keep your eye on what they do with Nike," Woods tells Benzinga of Nike Inc (NYSE:NKE).
Woods said Nike’s stock is not representative of the growing economy.
"It’s actually being left behind."
Woods said Nike shares are trading at 2017 lows and could be next to be replaced.
When it comes to replacing Nike in the index, Woods said it could be tough as the index makers will want to replace it with a consumer discretionary name.
While Woods isn’t predicting SpaceX (NASDAQ:SPCX) to be added to the Dow Jones Industrial Average anytime soon, the market expert highlighted how the company, best known for the space sector, is classified as an industrial and defense stock. This means the stock could someday replace an industrial or defense stock in the index and wouldn’t have to worry about there not being any current space pure-plays in the index.
Price-Weighted Method Problems
While Woods is a fan of the Dow Jones Industrial Average, he can’t help but point out how the index’s price-weighted method can complicate things.
Top holdings Goldman Sachs (NYSE:GS) and Caterpillar (NYSE:CAT) currently account for around 22.7% of the SPDR Dow Jones Industrial Average ETF (NYSE:DIA), which tracks the index.
"Those two alone could split two-for-one and still be the biggest weighted stocks in the index," Wood said.
Woods said the index should put pressure on the two companies to split their stocks to better diversify the index.
Photo: Markus Mainka / Shutterstock
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