Do These 3 Minnows Even Belong in the Dow?


"But I'm losing my edge to better-looking people with better ideas and more talent.
And they're actually really, really nice.
I'm losing my edge."

--LCD Soundsystem, "Losing My Edge"

The Dow Jones Industrial Average (INDEX: ^DJI) is the most widely quoted and deeply respected barometer of the American markets. Here, you'll find an august collection of 30 blue-chip stocks, each one uniquely qualified to represent a large slice of the total market.

Yet a handful of these chips don't look all that blue anymore. Should Dow Jones parent CME (NAS: CME) slash these tickers from the index in order to cultivate our respect?

Let's start at the bottom
The smallest marker on the Dow board is aluminum producer Alcoa (NYS: AA) . It's arguably the most direct Dow proxy for basic materials and pure infrastructure plays, and the sector surely deserves a voice. But it's also a dwarf among giants. Many Dow members are worth at least 10 times Alcoa's $9.3 billion market cap. Time for a change?

Maybe not. Alcoa may be small, but it's actually one of the largest metal stocks in America. Arizona-based frontrunner Freeport-McMoRan Copper & Gold (NYS: FCX) isn't that much bigger at $38 billion, and none of our hometown heroes can hold a candle to Australian giant BHP Billiton's (NYS: BHP) $110 billion.

So Alcoa might not be the infrastructure stock to celebrate anymore, but the Dow can't turn its coat on a whim, either. This minnow can stay.

Working our way up
How about the second-smallest member, broad-range insurance wrangler Travelers Companies (NYS: TRV) ? A $27 billion market cap is peanuts in this group, and the former Citigroup (NYS: C) division is a relative newcomer to the Dow. Why, for Pete's sake, doesn't Berkshire Hathaway (NYS: BRK.B) represent the insurance industry instead?

Well, Travelers is actually the largest pure insurance stock available. Berkshire may be built on a core of insurance services, but it's actually a sprawling conglomerate. Insurance operations stood for just 33% of Berkshire's revenue over the last four quarters. Travelers looks pretty strong in that light, not to mention that its shares have outperformed the Dow by a wide margin recently. And if that weren't reason enough to keep Travelers on board, adding Berkshire to the Dow would wreak havoc on the index's price-weighted score.

There's another safe choice for you. Travelers ain't leaving town.

...or was it "down," after all?
And then there's Hewlett-Packard (NYS: HPQ) . If any stock should be booted off the Dow today, this one would have to be it.

HP used to be the peerless tech giant that its Dow status would imply, but that's simply not true anymore. The company is falling apart after a series of management scandals and outright mistakes. Asking CEO Meg Whitman to turn this sinking ship around is like asking Leo DiCaprio to row the Titanic ashore -- it's just not gonna happen.

HP shares have lost nearly half their value in the last year, and I don't see the drop stopping any time soon. The tech sector is already well-represented on the Dow today. Replacing HP with something from an underrepresented sector -- perhaps, for instance, Freeport McMoRan -- would align the Dow more closely with the core of the American economy.

Mind you, I don't expect the Dow to make any major changes right now. UnitedHealth Group (NYS: UNH) replaced Kraft Foods (NAS: KRFT) last month in the first component switch since the 2009 overhaul that brought in Travelers Companies and Cisco Systems (NAS: CSCO) . But the index managers' hands may be forced soon enough. Splitting the company into more manageable pieces may be HP's best shot at avoiding bankruptcy in the not-too-distant future.

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Fool contributor Anders Bylund has no positions in the stocks mentioned above. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Berkshire Hathaway, Citigroup Inc , CME Group, and Freeport-McMoRan Copper & Gold. Motley Fool newsletter services recommend Berkshire Hathaway and UnitedHealth Group. 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.

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