Breakout

Could Apple Become a Dow Component?

Breakout

After an unprecedented 10-year run we may have found something to derail the stock of Apple (AAPL): inclusion in the Dow Jones Industrial Average. Rumors are resurfacing that America's largest and most valuable company --with a roughly $420 share price and $385 Billion market cap-- could become a new Dow Jones Industrial Average component.

Only 30 companies comprise the DJIA; all manufacturers of industrials and/or consumer goods. The DJIA's mission is "to provide a clear, straightforward view of the stock market and, by extension, the U.S. economy." To market pros the limitations of a 30-stock index make the Dow something of an afterthought as they focus on the S&P 500 instead. Regardless, the Dow is the big daddy index to the vast majority of investors meaning it matters, regardless of what traders think.

"When you look at the Dow 30 companies, these are brand names out there, Americans use these products. You think of McDonald's (MCD), Coca-Cola (KO), Exxon (XOM); these are companies we use on a daily basis. So it just makes sense that you would add another brand name in there," says Todd Schoenberger, managing director at LandColt Trading.

What seems like a no-brainer decision made by a group of three people who manage Dow Jones indexing, actually comes down to a clear-cut problem with Apple itself: the company won't split the stock. The Dow weights companies by stock price. At more than $400 a share, Apple's stock would not only overpower the other 29 components it would have more than twice the impact of Dow stalwart IBM (IBM). According to research by Bespoke Investment Group, if Apple were to replace a smaller company, it's stock could make up over 20% of the Dow by weight.

"If they do add Apple in there, then you have to wonder who's going to be taken out. And that obviously could impact markets, it could really impact mutual funds, as well as 401(k) plans," says Schoenberger. For now, Apple remains only part of the NASDAQ 100 and seemingly every investor's portfolio on Earth. Could the anti-magic touch of addition to the Dow 30 bring Apple down? Stay tuned...

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