At first the moves seem baffling. The largest oil and gas company out. An obscure software company in? A highly regarded drug company out. A decent biotech in? A well-regarded aerospace company exits, another aerospace company gets ushered in after being booted a dozen years ago. Yet, that's what happened Monday night when the keepers of the Dow Jones industrial average changed its line-up swapping out Exxon (XOM) for Salesforce (CRM) , which just reported and will be on tonight on "Mad Money," ditching Pfizer (PFE) for Amgen (AMGN) and axing Raytheon (RTX) for Honeywell (HON) .
It pretty much defined today's action, though, and it's truly monumental change that will bring the averages closer to the reality of the new economy and away from the old one.
Before I delve into each trade, let's understand that there is a ceremonial notion to the Dow. It's like of like the King to the S&P 500 Prime Minister, which has the real sway. When I was a fund manager I included how my fund did against the Dow and the S&P, but I only included the Dow, because I had some older folks who still regarded the Dow as the most important benchmark. We live in a world of exchange-traded fund: the S&P 500 index ETFs have trillions in it and when new names get added there has to be a gigantic wave of buying and selling to accompany the trade. Not so the Dow, which has very little money invested in it. Still, it's a big deal if you work at the anointed companies, because they don't let just anybody join the club. And you can get dropped if you underperform -- see GE (GE) . But that really wasn't the case with any of the three who exited, although it's possible that one suffered such a fate and shame.
Let's go over the pairings.
First, I know not to bury the lead. The real shocker here is an oil company coming out and a cloud company coming in. OK, it's not just an oil company, it's Exxon-Mobil, the colossus that strode the world. Ten years ago, it was the biggest company on earth. It's been going down in rankings ever since, but it was still the fourth largest just four years ago. It was always considered to be the safest, most conservative oil company, but it lost that crown to fellow Dow mate Chevron (CVX) in the last few years. In fact I would go as far as to say that Exxon' s stock has an 8% dividend, which I think might be unsustainable although a lot of that is the 41% decline the stock has had this year.
This a stunning fall from grace for the company that has long considered to be the great oil and gas blue chip.
In its place is Salesforce.com, a $192 billion behemoth replacing a $172 billion troglodyte. Could there be a more antithetical pair than a carbon-based business and a business run by a man, Marc Benioff, who is trying to plant three trillion trees to do away with the pernicious effects of carbon. Exxon was founded in 1870, when it was the bedrock of the old Standard Oil Company. Salesforce is 21 years old. Salesforce came public in 2004 and it is up 7,755% since then. Who said that individual stocks just carry individual stock risks? I think those who say that should be held up to closer scrutiny.
I think this is a fantastic move, because Exxon represents the economy's old fuel, oil and gas, Salesforce.com represents the new fuel, code, cloud and digitization. I know it is a business-to-business operation, but as someone who has run a business, I can tell you that we had a 30% lift in the business soon after Salesforce was installed. What I have been saying forever, that oil and gas is not investible, has been validated by this move.
How about Pfizer out and Amgen in? This one I am torn on. Maybe Pfizer is too much like Merck (MRK) of Johnson & Johnson (JNJ) . If that's the case I would have gone the medical instrument way, perhaps an Abbott (ABT) , or a Thermo Fisher (TMO) , but I think they were very specifically looking for some biotech as a sign of the relevance of companies that make new medicines using biotechnology. Amgen used to be one of the great growth companies of all time. It's up over 72,000% since it came public in 1983, great return but hardly a spring chicken. I'm sure the Pfizer people are scratching their heads as the growth rates are actually similar and Pfizer has an almost four percent yield. But it doesn't bring the young diversity the index needs.
Now, you may be completely confused by the Raytheon for Honeywell swap, but this one made a ton of sense. When United Technologies split into Otis (OTIS) , Carrier (CARR) and the aerospace business that merged with Raytheon Technologies, then what you got was something too akin to Boeing (BA) , which is already a Dow stock.
In the meantime. Honeywell, which was an aerospace division that's about 37% of its revenues also has building technologies, performance materials a and safety and productivity solutions and all of these are highly engineered businesses unlike any others. The company is revolutionizing all sorts of what seem like banal industries. We are watching, for example, its Aclar health care business, which is developing vaccine packaging far more practical than glass vials. Its building efficiency products are packed with software. Its Intelligrated warehouse automation business enjoyed 20% growth and a 300% increase in orders and 140% growth in backlog. It has the best mask franchise for those worried about covid and it has a remarkable battery division that might produce a battery that can store a great deal of energy for almost 10 hours.
Plus, Honeywell has about the best balance sheet in the industry, and I expect some M&A that could bulk up its software presence. I consider Honeywell the most digitized of all industrials, even as many claim that mantle. Like Salesforce.com it is a very big position in my charitable trust, and I was hoping it would go lower so I could buy some more. Now I think everyone knows what I know: This is a different kind of industrial.
Now, I don't want to speculate on the direction of the Dow, because of these three additions. It probably won't matter much. Those who bought the winners might not want to hang around without knowing what the companies really do. This isn't like the S&P where you buy and flip; there's no one to flip to.
That said, I think that the Dow had grown dowdy? Do you really need two oil and gas companies when the industry is shrinking? Do you need three similar drug companies? The double down in aerospace would make little sense even as I think a return of travel would send Raytheon soaring.
I know that this re-balancing comes about because of a need to have more information technology in the index given how big it has become. I think the job's almost done. There are still some stragglers out there in the index that could be switched out. And what do we do with Facebook (FB) , Amazon (AMZN) , and Alphabet (GOOGL) , which I think make too much sense not to be there. Then again, it is Dow Jones Industrial Average, so these changes will have to do.