On September 23, 2013, the committee that makes changes to the Dow Jones Industrial Average added and dropped three companies from the index. The three companies dropped were Alcoa Co. (AA), Hewlett-Packard (HPQ) and Bank of America (BAC). The three companies added to the index were Nike (NKE), Goldman Sachs (GS) and Visa (V). Below is the price performance of all six companies since those changes to the Dow Jones Industrial Average were made.
Worth noting is the fact that Alcoa Co. and Hewlett-Packard exceeded the price performance of all three additions to the index until June 2015. Nike and Visa have recently achieved outperformance of all three stocks dropped from the index, however, if the current decline in the stock market continues, we suspect that the recent gains of Nike and Visa could be short lived, until the eventual rebound in the market.
On March 19, 2015, Apple Co. (AAPL) was added to the Dow Jones Industrial Average while AT&T (T) was dropped from the index. The performance of the two stocks since that time shows Apple down –10.06% and AT&T down –3.10%.
The outperformance of stocks dropped from an index is not as unusual as it would seem. Typically, index managers tend to drop stocks that appear weak in price performance and going through a transition to resolve the internal issues contributing to their weakness. At the same time, stocks that are added to an index just coming off a period of exceptional growth and are about to experience a readjustment period resulting in a decline in their stock price. The result is stocks being added to the index will adjust lower in price while the timing of the companies dropped from the index coincides with a resurgence in earnings surprises and increased stock price.