WHO SHOULD REPLACE GM IN THE DOW?

I should start by noting that I hate the Dow.  When people refer to the market they should always refer to the S&P 500.  The Dow is just 30 names and for the last two years it has been represented by more than a couple of really terrible names (AIG and GM to name a few).  One of those horrible names is leaving the index soon as GM rides into the bankruptcy sunset.  Despite my personal views on the Dow (I wish they’d just get rid of it) it remains an important historical index.   With that said, I’ve put together some mindless near weekend thoughts on who should replace GM….

The rumors I hear have narrowed it down to a handful of names:

1. Goldman Sachs

2. Cisco

3. Wells Fargo

4. Apple

5. Google

6. Oracle

Let’s start with Goldman.  In my opinion Goldman would be at $0 if not for government intervention.  They were entirely reckless during the credit boom and there is no doubt in my mind that the government and the firm’s strong ties to the government is the only reason why it still exists in its independent form.  That alone makes them ineligible in my opinion.  Plus, their trading/M&A business is not the diversified kind of financial firm I think the index should represent.

Cisco –  A good candidate.  Strong brand name, good management, good balance sheet.  Tech is well represented, however, in the Dow at nearly a 20% allocation.

Wells Fargo –  I would reiterate my opinion from GS.

Apple – Great company.  I waited in line for hours to get my first iPhone.  There’s something so unique and revolutionary about the iPhone. I’ll never forget when I got my iPhone 1 and people would literally stare at it in public. It’s such a game changer. Perhaps the most important piece of hardware to emerge since the personal computer. Still, given their rollercoaster ride as a corporation I don’t know it they’ve quite earned that spot in the Dow yet.

Google – Great company.  I can’t imagine there’s super high barriers to entry here, but the company has overcome some amazing competition in recent years and emerged as the frontrunner in the ad space. Hard to imagine it wanes any time soon, but perhaps too soon to put a crown on their head either.

Oracle – I reiterate my CSCO comments.

Personally, I think a financial firm should go into the Dow as financials now represent less than 6% of the index.  My vote would be for MasterCard or Visa.  Strong brands, great balance sheets, great management teams, global businesses, high market caps, strong histories, diversified businesses that represent consumer and business growth.  Either one would be a great fit.  What do you think?

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.