Inclusion into the prestigious Dow 30 doesn't necessarily mean outsized gains suddenly
This week, two new stocks are joining the Dow Jones Industrial Average, Nvidia Inc (NASDAQ:NVDA) and Sherwin-Williams Co (NYSE:SHW). The Dow is a widely followed index made up of the 30 biggest companies with a history dating back to the 1800’s. NVDA and SHW will be replacing Intel (INTC) and Dow Inc. (DOW) – no relation to the index. This week, I examine past changes to the Dow’s constituents and explore how the stocks tended to perform after being added or removed.
The New Guys
I have a list of 26 stocks that have joined the Dow Industrials since 1997. I looked at how those stocks performed after officially being added to the index. The table below summarizes the returns. The second table is for comparison, and it shows what the returns looked like had you purchased the index instead of the individual stocks.
The results are mixed. The stocks averaged an 8% return over the first three months after being added to the index with 65% of the returns being positive. However, a year after the additions, those same stocks were up just 1.74% on average, with less than half of the returns positive. Based on this, avoid NVDA and SHW and put that money in a Dow index fund. Purchasing the Dow Index rather than the stocks would have yielded a 7.45% return on average with 84% of returns positive over the next year.
The last change to the Dow was earlier in February, when Amazon.com Inc (NASDAQ:AMZN) replaced Walgreens Boots Alliance Inc (NASDAQ:WBA). Since then, AMZN has gained over 12%, while WBA is down more than 50%. The table below shows the stocks added to the Dow since 2010. These stocks have fared better than the summarized table above but still, less than half have outperformed the index over the next six months and year.
Does a Boot from the Dow Mean Anything?
My list of stocks removed from the Dow is less than stocks added, because more of these companies have gone out of business or have been bought out. So perhaps we’re not getting the full picture. The 18 stocks I have data for have performed terribly, especially immediately after leaving the index. These stocks have averaged over an 8% loss over the next month of trading after leaving the index with only 17% being positive or beating the Dow Index. The six-month returns also underperform by a lot averaging a loss of 2.7% with 33% positive. Nine of the 18 stocks, however, have beaten The Dow over the next six months.
Here’s the list of individual stocks removed from the index since 2010. These ten stocks show significant underperformance in the first month of trading, averaging a loss of 3.8% with just 30% positive and 30% beating the Dow Index. Over the longer term, the stocks eliminated from the index have done much better than stocks added. Over the next year, these stocks averaged an impressive 28% return with 67% of them beating the index. The stocks added to The Dow since 2010 have averaged a return of 6.3% with just 44% beating the Dow Index (see table above).
Long-Term Implications for Dow Shakeups
One way to look at index changes, especially on such a popular index, is as a driver or indicator of sentiment. Stocks added to the blue-chip index could gin up some positive sentiment, while those eliminated might get the stocks off some people’s radars. I could argue the data above supports this interpretation. New stocks in the index underperformed and have been less likely to beat the index than those kicked out of the index. I’m focusing on the data since 2010. Based on the analysis, perhaps wait at least a month then take a look at the two stocks recently eliminated, INTC and SHW.