As popular as the Dow Jones Industrial Average (INDEX: ^DJI) is, it has one interesting characteristic that's different from most other market benchmarks: The Dow is a price-weighted average, which means that a company's share price is what determines that company's impact on the average.
That gives the highest-priced stocks in the average disproportionate influence over the Dow. Let's take a closer look at the three highest-priced stocks in the Dow and examine what's going on with these key companies.
IBM (NYS: IBM) , $210.59
IBM has been around a lot longer than most of the other tech companies in the Dow, so some might argue that giving it as much weight as it gets -- more than 10% of the entire average -- leaves the Dow behind the times. Yet IBM has come a long way from the days of the electric typewriter.
In particular, IBM has moved beyond its hardware roots to emphasize higher-margin business lines like information technology services. Most recently, IBM has started moving into cloud computing, a high-growth industry that has become the next battleground for tech supremacy. IBM has lofty goals, but it has performed well and stands as a worthy representative of the tech sector.
Chevron (NYS: CVX) , $117.50
You can see the most obvious impact of how price-weighting affects the Dow in the energy sector. ExxonMobil (NYS: XOM) towers above the rest of the big oil companies, yet by virtue of its higher share price, Chevron has more influence than Exxon.
Both energy giants have plenty of potential, especially as oil prices remain reasonably high and new opportunities for growth around the world abound. But Chevron's recent forays into South America have at least one Fool contributor concerned about whether the company is pushing too hard to try to grow. When you combine Chevron's and Exxon's weights, they come reasonably close to giving the Dow fair representation in energy.
3M (NYS: MMM) , $94.96
3M has always been known for its innovation. With a wide range of products spanning across several industries, the conglomerate has plenty of interesting prospects to pursue.
Most recently, 3M decided to buy specialty ceramics company Ceradyne (NAS: CRDN) . The $860 million price tag represents a 43% premium, but with applications from combat armor to power generation, Ceradyne's product line should make a good addition to 3M's already formidable line of energy and advanced materials.
Share prices may be what determine the Dow, but stocks can be profitable regardless of the price of their stock. To help you keep the right perspective, be sure to read The Motley Fool's popular special report and learn about the three top prospects in the Dow. The report is absolutely free, so get your copy today.
The article 3 Dow Stocks to Keep Your Eyes On originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Exxon Mobil, Ceradyne, and IBM. Motley Fool newsletter services have recommended buying shares of Chevron and 3M. Motley Fool newsletter services have recommended creating a synthetic long position in IBM and creating a diagonal call position in 3M. 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 Fool has a disclosure policy.
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