Schaeffer's Outside the Box Blog
Stocks quoted in this article:

It was nearly six months ago that the Dow Jones Industrial Average (DJI) shook things up by booting out three old names in favor of hipper alternatives. Marking the index's most sweeping change since April 2004, Goldman Sachs Group Inc (NYSE:GS), Visa Inc (NYSE:V), and Nike Inc (NYSE:NKE) all joined the Dow, replacing Bank of America Corp (NYSE:BAC), Hewlett-Packard Company (NYSE:HPQ), and Alcoa Inc (NYSE:AA), the last of which had been part of the index since 1959.

At the time, our Senior Quantitative Analyst Rocky White ran a study to see if being added to the venerable 30-stock index proved to be a good thing. [Recently added names include UnitedHealth Group Inc. (NYSE:UNH) in September 2012, Cisco Systems, Inc. (NASDAQ:CSCO) in June 2009, and Chevron Corporation (NYSE:CVX) in February 2008.] In summary, Rocky found that "Once added, the stocks seemed to struggle a bit."

But has this been the case for the new Dow members this time around? Here's a look at the returns for all six names, from the close on Sept. 20, 2013 (the trading day prior to the Sept. 23 switch) through the March 17 close. The names new to the Dow are highlighted in blue.

Table of new and old Dow stock returns

All three names booted from the Dow last September have managed to shake off the rejection, posting double-digit gains in the ensuing months. Two of the Dow's new components have also gained ground, while Goldman Sachs has posted a slight decline. On a year-to-date basis -- through yesterday's close -- all six names are in the black, with the exception of GS.

Visa looks interesting from a contrarian perspective, as there are signs of lingering skepticism in spite of the stock's long-term uptrend. Short interest has been slowly building since early 2013, and now accounts for almost 15.6 million shares. At the stock's average pace of trading, it would take almost six days to cover all of these bearish bets, paving the way for a potential short-covering rally.

On the options front, Visa's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio has accelerated higher from 0.54 at the end of last year to its present reading of 0.70. In fact, this ratio stands just 8 percentage points shy of a new annual peak, suggesting long puts have rarely been in greater demand, relative to long calls. If short sellers or option bears begin to head for the proverbial hills, Visa shares could start to make their way back toward new-high territory.


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