This Stock Should Be Added to the Dow Jones Industrial Average

By Markets Fool.com

The Dow Jones Industrial Average is a collection of 30 of the largest and most well-respected companies in the United States. However, the case can be made that not all 30 companies belong there, as other stocks make more sense for the index. Here are three stocks that our analysts think would be a great fit for the Dow.

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Dan Dzombak
Apple
is the most obvious choice for a new Dow addition because it is by many measures the largest company in the U.S. It leads the nation in total income, having earned $39.5 billion last year. By revenue, it was the fifth-largest company in the U.S. at $180 billion in sales. Finally, Apple's market capitalization of $633 billion is nearly 65% greater than that of the next two largest U.S. companies, ExxonMobil and Microsoft, which both sport market caps of around $380 billion.

For an index whose stated goal is "to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy," excluding one of the biggest and most economically important companies in the world is a clear oversight.

Furthermore, Apple looks more like a Dow shoo-in than ever since it split its stock 7-for-1 last year. You see, the Dow Jones Industrial Average is weighted by price, so companies with higher stock prices have a greater effect on the index. This outdated model,a relic of the Dow's formation in the early 1900s, has led certain companies to have outsize influence on the index despite their relatively small market caps. That's why for years Apple was essentially ineligible for inclusion in the Dow; its high stock price would have given it far too much influence on the overall index. However, since the stock split, its share price would be middling for a Dow component.

While there has been talk of changing the Dow to a market cap-weighted index like the S&P 500, the company that runs the Dow said last year that it would more likely consider increasing the number of stocks in the index from the current 30. So who knows -- maybe soon we'll be talking about the Dow 50 or even the Dow 100.

Dan Caplinger
As obvious a pick as Apple is, another stock that seems like a big omission from the Dow is Warren Buffett's Berkshire Hathaway . For a long time, Berkshire had the same problem that Apple did: Even its lower-priced B shares were simply too high-priced to work in the Dow's price-weighted model. But when Berkshire split its B shares 50-for-1 in order to accommodate Burlington Northern shareholders in Berkshire's takeover of the railroad company, its share price suddenly fell into a viable range for inclusion in the Dow.

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Berkshire's market capitalization is more than 10 times larger than the Dow's current insurance representative, Travelers . Obviously, Travelers is more of an insurance pure play than Berkshire, which holds businesses spanning consumer goods, energy, utilities, transportation, and a host of other industries. Yet the Dow has always had a number of multi-industry conglomerates. Given the iconic status that Berkshire and Buffett share with the Dow, the most widely followed benchmark of the U.S. stock market, bringing them together seems a natural choice and would be the perfect cap to Buffett's esteemed career in the investing world.


It might sound crazy, butAmazon should be part of the Dow. Hear me out: The Dow is supposed to be representative of both the overall American stock market and economy, yet it doesn't represent the changing face of American commerce.Wal-Mart and Home Depot are the only two retailers in the Dow, and neither is particularly identified with the major shift in retail to the Web that has been underway for over a decade.

Think Amazon isn't "big" enough to be in the Dow? Over the past 12 months, "The Everything Store" had more revenue than Nike and Coca-Cola combined:

NKE Revenue (TTM) Chart

Whether you love or hate Amazon as an investment, it is the obvious candidate to represent a crucial segment of theAmerican economy on the Dow.

The article This Stock Should Be Added to the Dow Jones Industrial Average originally appeared on Fool.com.

Dan Caplinger owns shares of Apple and Berkshire Hathaway. Dan Dzombak has no position in any stocks mentioned. Jason Hall owns shares of Amazon.com, Apple, Berkshire Hathaway, Coca-Cola, and Wells Fargo. The Motley Fool recommends Amazon.com, Apple, Berkshire Hathaway, Coca-Cola, Goldman Sachs, Home Depot, Nike, Visa, and Wells Fargo. The Motley Fool owns shares of Amazon.com, Apple, Berkshire Hathaway, JPMorgan Chase, Nike, Visa, and Wells Fargo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.