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Extra11/5/2009 8:26 PM ET

Why investors should ignore the Dow

The 30-stock index represents the market to many people. But few of the stocks are worth buying, and a third should be dumped fast. If you don't own them, why follow them?

By James Dlugosch, InvestorPlace

Rightly or wrongly, the 30 stocks in the Dow Jones industrials ($INDU) define the U.S. stock market for millions of people. Lots of funds, 401k's and individual retirement accounts rise and fall based on what the index does.

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So here's a scary thought: Only a handful of the 30 companies in the Dow are worth buying right now, and more than a third should be dumped immediately.

Take Bank of America (BAC, news, msgs). Despite $20 billion in bailout funds and a $118 billion backstop on loan losses, the company still managed to lose $2 billion in the third quarter. The government has guaranteed it won't go broke, but it's hardly an economic leader.

Or consider General Electric (GE, news, msgs). Profit dropped 44% in the third quarter, and the company recently announced plans to lay off an additional 3,000 workers. Yes, it's still one of the world's biggest manufacturers, but its stock price, near $14, is down from $40 two years ago, and the Jack Welch glory days are behind it.

This at a time when the broader economic indicators -- last week's robust gross-domestic-product report, for example -- seem to be pointing up. The market has been rallying since March. Certainly some members of the Dow 30 would be expected to lag, but more than half?

Times like this show the Dow is basically meaningless. Too many of the component companies are former kings of industry that simply have little to say about where the broader market is heading.

In short, the Dow isn't a group of stocks you'd want to own and much less one the whole market should follow.

The Dow's identity crisis

If the past 18 months have taught investors anything, it's that change is the only constant on Wall Street. And this makes the Dow all the more frustrating.

The Dow was founded in 1896 in an effort to reflect the stock market and take the pulse of the broader American economy. The 12-company lineup was a pretty good sampling of the era, featuring utilities, sugar growers and railroads. But in the years since, the Dow has morphed into a patchwork index with no real meaning.

Take the most recent changes to the Dow, made last year: Kraft Foods (KFT, news, msgs), Travelers (TRV, news, msgs) and Cisco (CSCO, news, msgs) replaced bailed-out busts American International Group (AIG, news, msgs), General Motors and Citigroup (C, news, msgs).

But why was Citi shooed away while Bank of America, nearly as dependent on Uncle Sam, remained? And why add Cisco, a stock that peaked in 2000, rather than more-influential tech names such as Apple (AAPL, news, msgs) and Google (GOOG, news, msgs)?

More frustrating is the fact that it took the worst market shakeup since the Great Depression to get GM off the list. If GM hadn't gone bankrupt, it would still be in the Dow, though it and the U.S. auto sector had been declining for years.

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Those three are gone, but many of the remaining components aren't much better. Fundamental analysis of earnings performance and sales growth for the Dow 30 leads me to believe that more than a third of the stocks are ones I'd advise investors to dump.

These 13 companies have been struggling to turn a profit, have lost market share or have seen their stock prices plummet -- or all three -- over the past couple of years. Do we really want them to represent the U.S. market?

(For more on these names, read "13 Dow stocks that are doomed" by my colleague Louis Navellier at InvestorPlace.com.)

Continued: 3 Dow stocks to buy

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Thursday, November 05, 2009 9:25:43 PM
Its not all gloom and doom. The market always moves up over time . If you want to day trade it then I guess your right. But If you want to make money then stick with it and do your homework!Open-mouthed
Thursday, November 05, 2009 11:27:25 PM

The Dow is an index that is supposed to help people get a sense of how the US stock market is doing. It's not intended to recommend good stocks to buy. Given how closely it tracks other indices like the S&P 500, I think it's doing a perfectly fine job.

If the Dow dropped companies just because they were doing poorly, then the index would no longer be representative of anything -- it would just be a list of the perceived hot stocks.

Friday, November 06, 2009 6:36:18 AM

It's true that the DOW was developed before the use of computers and is limited in it's ability to reflect the total market.  But what index is as widely know or used to reflect market conditions.  I think before you go out and change the world you are going to have to come up with a better index.  Better because it is more widely known and trusted.  Any capable investor knows the shortcomings of the DOW and yet there is no index as widely accepted, simple and dependable.  Of all the plethora of indexes, none has the impact of the DOW.

Friday, November 06, 2009 8:02:46 AM

"These 13 companies have been struggling to turn a profit, have lost market share or have seen their stock prices plummet -- or all three -- over the past couple of years. Do we really want them to represent the U.S. market?"

 

Unfortunately, they do represent the market that many people are experiencing.

 

The author seems to want the market to be represented only by stocks that are mostly up.  

 

And then he makes statements like, "Only a handful of the 30 companies in the Dow are worth buying right now, and more than a third should be dumped immediately."  Well, duh.  In my analysis portfolio, there are less than 200 companies in the entire market that are worth owning.  Is it really news that out of a set of 30 large-cap stocks, there are only a couple that are worth owning?

Friday, November 06, 2009 8:34:08 AM

I don't think anyone with a MBA or a small business understands what the Republicans and world corporations did to our economy.  Its very simple.  Small business owners simple can't compete with cheap foreign labor from China.  Even if you have intellectual property rights, Free Trade Agreements will steal all your consumers, because consumers buy value.  Since, cheap labor businesses can produce a higher value item or good, they steal more and more consumers to their cheap labor goods.  The high unemployment is directly caused by Free Trade Agreements and the economic recession can't end without one of three things happening.  The dollar drops like a brick.  The US goes through a great depression.  The repeal of FTA and US goes to strict balanced trade.

 

 

Friday, November 06, 2009 11:27:30 AM

asdf...

 

what do you think happened to AIG or GM?... they "used" to be in the Dow.  Why aren't they now????  because of the very thing you just described.  The Dow is not representing what it used to becuase they ARE removing lower valued stocks from the index.  geez... someone do their homework before they type will ya?

Friday, November 06, 2009 11:43:45 AM
Footloose... if you agree with the author why dont you just say so instead of spinning it like you're on board with the rest of these "lose my shirt" investor wannabe's?
Friday, November 06, 2009 12:10:31 PM
The Dow is a representative reflection of the American market - warts and all. What will filling it with winners accomplish?  It would be misleading. Not to mention your assessment is a tad bit over the top - things are not that black and white.
Friday, November 06, 2009 12:37:10 PM
The dow indicator seems to show the same market changes as the other indexes, within a pretty close plus or minus, so unless the author has some statistical evidence to present otherwise, I suggest the author is wrong about how well the dow works. Sounds more like he is betting that he can pick em better. So let's note his portfolio picks and see how well he does compared to the dow over the next period of time.   
Friday, November 06, 2009 12:43:18 PM

Ichibod...

Are you trying to say the governement is not trying to be misleading?  What makes you think they would stop at the Dow?  Of course its not representing the market... not fundamentally anyway.  10.2% "reportable" unemployment.  You don't think the GDP number was "misleading"???... what are you smoking my friend?  Every bit of that GDP was misleading... from "cash for clunkers" to homebuyer credits... our economy is not running on its own fuel... its running on barrowed fuel that can't be paid back without deeper wounds in the Amercian workers pocket down the road.  The future has hard work for less written all over it and its going to last longer because of "misleading" government policy.  If you don't understand this you have to have some pretty thick blinders on.

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