Apples to apples. It’s a phrase you hear a lot in finance.
It refers to having data from one period which is directly comparable to data from a previous period.
‘Same-Store Sales’ is a perfect example of this when analyzing retail stocks.
Comparing quarterly results of one quarter with the same one a year before to eliminate seasonality effects is another example.
But as we watch markets making new highs by the day, it makes us wonder if we have an adequate ‘apples-to-apples’ approach when we look at market index performance.
Take the Dow Jones Industrial Average (DJIA), for example. Today, it’s comprised of thirty stocks. It hasn’t always been that way, though. In 1896, it contained only twelve stocks. In 1916, it increased to twenty. And as you might imagine, the thirty stocks of today aren’t even the same thirty of just a few years ago.
In 1999, four stocks were swapped in the DJIA. Chevron (NYSE:CVX), Sears (NASDAQ:SHLD), Goodyear (NASDAQ:GT), and Union Carbide made way for Microsoft (NASDAQ:MSFT), Intel (NSADAQ:INTC), SBC Communications and Home Depot (NYSE:HD). In 2004, AT&T (NYSE:T), International Paper (NYSE:IP), and Eastman Kodak (OTC:EKDKQ) stepped aside for Verizon (NYSE:VZ), AIG (NYSE:AIG), and Pfizer (NYSE:PFE). A year later, AT&T was back in because of its merger with SBC, and in 2008 Chevron was brought back, this time accompanied by Bank of America (NYSE:BAC).
With all of these changes, it’s not so straight forward comparing the DJIA’s performance over the years.
Regardless, the index keeps climbing from strength to strength, making new highs.
Would the DJIA still have made its march to 15,000+, given the fragile nature of the domestic economy, had it not been for changes in the Dow components? I expect if an ‘apples-to-apples’ comparison was made, the answer would be crystal clear.
After all, the individual stocks within the DJIA are handpicked by Dow Jones’ Averages Committee at their discretion. From Dow Jones:
“While stock selection is not governed by quantitative rules, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. Maintaining adequate sector representation within the index is also a consideration in the selection process.”
Is the committee swapping out stocks that have lower growth expectations for ones with rosier prospects?
While we are not trying to drum up old conspiracy theories, the lack of a quantitative basis for DJIA stock selection has vexed many industry participants for years. There are certainly economic motivations to want to keep this index relevant, and as “the symbol” of Wall Street itself. So could we see some new stocks ushered in to push the DJIA beyond current levels to 20,000 or more?
If so, at least one stock has to go – immediately.
It’s ExxonMobil (NYSE:XOM).
Our take on XOM is one of caution. While the stock pays a 2.8% dividend yield and is naturally more attractive than the CDs offered at your local bank (risk aside), there are technical headwinds that could severely pull the reins on what seems like a never-ending bullish run.
In the weekly price chart of ExxonMobil (NYSE: XOM) below, we noticed several attempts to break and sustain higher movement above $95 per share. The resistance line was drawn back in late 2007, coinciding with the overall drop in the stock market. Again and again, the bulls fought diligently to maintain positive momentum but eventually failed in breaking through that line.
ExxonMobil’s performance lagged the overall market rebound in 2009, but it eventually turned things around. And while the DJIA has made new all-time highs, we continue to see a lack of confirmation from XOM. As pointed out in the chart with red arrows, the stock has again tested $95 resistance several times with no luck in breaking through – destroying its uptrend.
While many XOM shareholders may be content to simply receive the dividend income it provides, those looking for a boost from share price appreciation have been stuck in limbo for the past five years. And if XOM fails to break $95 to the upside, it could mark a significant divergence which may signal a loss of confidence in the company’s growth prospects for many years to come.
And we suspect that with a loss of confidence in XOM’s growth outlook, a certain committee might hold an unscheduled meeting…
P.S. Check out our comprehensive financial newsletter, Investor Playbook. It uncovers “under the radar” investment opportunities often spared by problems in overall markets.