Why Alcoa, Hewlett-Packard Should Still Be in the Dow Industrial 30

NEW YORK (TheStreet) -- Anyone who sold Alcoa (AA) and Hewlett-Packard (HPQ) to buy into Goldman Sachs (GS) , Nike (NKE) and Visa (V) lost out. Why would investors have done this? A year ago today, Goldman Sachs, Nike and Visa replaced Alcoa, Bank of America (BAC) and Hewlett-Packard as members of the Dow Jones Industrial Average (DIA) .

The two former Dow members, Alcoa and HP, have more than outperformed the benchmark's newer names. The S&P Dow Indices committee justified these changes due to the low share prices for the stocks removed a year ago. The Dow committee also wanted to further diversify sectors and industries in the Dow 30.

Let's look at how Alcoa and HP did, and consider how to profit from Nike's upcoming earnings report.

Alcoa should not have been removed. The company was on a clear path to recovery, as resurgent sales of new automobiles increased demand for aluminum. Investors who sold shares of Alcoa a year ago lost out on a year-over-year gain of 91%.

Hewlett-Packard should not have been removed either, as CEO Meg Whitman was successfully implementing the company's turnaround. Investors who sold these shares missed out on a gain of 72% year-over-year.

Yes, the new Dow components had solid year-over-year gains: Goldman up 12%, Nike up 17% and Visa up 9%. But former Dow member Bank of America still showed a gain just above that of Nike.

The S&P committee also wanted to improve the performance of the Dow Jones industrial Average. The higher the share price, the greater the impact a stock has on the ups and downs of the index.

But that's a problem for investors, who really do not care too much about index performance. They want to own winning stocks.

Alcoa's quarterly earnings release was considered the unofficial start of earnings season when the company was in the Dow 30. Nike has taken over this status for the Dow 30 and will kick off earnings season after the closing bell on Thursday. (Alcoa will be the first major company to report results for a quarter finishing at the end of September, however, because Nike's latest quarter finished at the end of August.)

Analysts expect Nike to report earnings per share of 88 cents. Nike has a string of eight consecutive quarters where the company beat analysts estimates.

Nike shares have been on a steady rise since April, tracking the rise of its 200-day simple moving average, now at $76.34. Nike helped the Dow 30 reach its recent all-time intraday high, setting an all-time high of its own at $82.79 on Sept. 8. A close on Friday below a key moving average at $79.70 would be warning of a correction.

Investment Strategies for Nike:

NKE Chart

NKE data by YCharts

Investors looking to buy Nike shares should consider entering a "good-'til-canceled" limit order to buy weakness to $74.10, a share price that I project should hold on weakness.

Investors looking to sell Nike shares should consider entering a "good-'til-canceled" limit order to sell strength to $83.03, a share price that I project should limit the upside for the stock.

At the time of publication the author held no positions in any of the stocks mentioned.

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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


TheStreet Ratings team rates ALCOA INC as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALCOA INC (AA) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, increase in net income, growth in earnings per share and good cash flow from operations. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

You can view the full analysis from the report here: AA Ratings Report

Richard Suttmeier, a former U.S. Treasury trader and trading manager in the primary dealer community, has more than 40 years of experience in the U.S. financial markets. Richard is an engineer by education with a master of science degree. He has been writing newsletters and market commentaries since 1984, and his engineering and trading background are the foundation for the combined fundamental and technical analysis used in the stories he writes exclusively for TheStreet.com. Richard’s “Crunching the Numbers” tables provide; key moving averages, weekly stochastic readings, earnings estimates, and value levels and risky levels at which to buy on weakness or to sell on strength. His stories cover: regional and community banks including data from the FDIC Quarterly Banking Profile, homebuilders following NAHB data and single-family starts, and stocks in several sectors including, transportation, healthcare, and retail. During earnings season Richard provides trading guidelines for popular stocks before they report, then scorecards after they report.


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