Reading Between the Numbers on ‘New Dow Highs’
Fun with numbers: The Dow Jones industrial average hit another record high on Tuesday, adding 5.77 points to 7,085.16. So how many of the 30 Dow stocks would you suppose ended at new highs individually? Fifteen? Ten? Five?
How about two: Alcoa, which rose $1.13 to $76, and Philip Morris, which gained 88 cents to $139.75.
Yep, those were the only individual highs set within the Dow, even as the world’s most closely watched stock index moved further into record territory. Which is a good reminder of just how misleading the Dow can be as a symbol of what’s really going on in the stock market.
The Dow is a “price-weighted” index. That means it is affected more by the dollar amount that its component stocks move than by their percentage moves. Thus, big dollar moves in the Dow’s richest stocks can skew the index, even though the moves may be insignificant in percentage terms.
In contrast, the Standard & Poor’s 500 and New York Stock Exchange composite indexes are “market-value-weighted,” which means moves in the stocks with the largest market capitalizations (stock price times number of shares outstanding) have the greatest impact on those indexes, regardless of the stocks’ individual price levels.
Within the Dow, nine stocks now trade at prices above $100 a share. On any given day, relatively small moves (in percentage terms) of $1 to $2 a share in those stocks can mean a new high for the index, even if the Dow’s lower-priced shares are moving down sharply in percentage terms.
So far in 1997, the Dow’s 9.9% year-to-date rise has been powered by strong price and percentage gains in its highest-priced issues. Meanwhile its lowest-priced shares have either fallen or are up modestly, but they count for little in the index.
Of course, this game cuts both ways: The higher the prices of the leading Dow stocks, the more they will skew the index to the downside if they begin to pull back--which could make any future decline in the Dow appear much more severe than would be reality for most of its stocks.
New USA Fund to Merge: William J. O’Neil, publisher of Investor’s Business Daily newspaper in Los Angeles, is getting out of the mutual fund business. O’Neil announced Tuesday that his $215-million-asset New USA Growth stock fund will merge into the Boston-based MFS Emerging Growth Fund, if shareholders approve.
New USA Growth was launched in 1992 as a showcase for O’Neil’s stock-picking prowess, which made him a very rich man in the 1970s and ‘80s and gave him the wherewithal to launch Investor’s Business Daily. The fund, managed by O’Neil protege David Ryan, got off to a rocky start. Yet its three-year gain of 66.8% through 1996 beat the average growth fund’s 53.5% gain. Even so, like most funds, it lagged the S&P; 500’s 69.3% rise.
No Deal at Herbalife: Mark Hughes, CEO of Los Angeles-based vitamin and weight-management-products marketer Herbalife International, thought he had a good plan for diversifying his estate: He announced on Jan. 31 that he would let go of about one-quarter of his stake in the company--up to 4.6 million shares--by transferring them to brokerage Salomon Bros., for cash.
The brokerage would then sell to the public interest-bearing notes backed by the stock. At the maturity of the notes, in about three years, the investors would either receive the stock Hughes had set aside, or a cash payment from him.
However good it sounded to Hughes, the market has gotten in the way: With Herbalife stock having sunk 28% since the plan was announced, Hughes scrapped the idea Tuesday.
Such swap transactions have become fairly common on Wall Street in recent years. In theory investors needn’t be spooked by them, because there is no risk of a sudden deluge of new shares into the market that would depress the price.
But Hughes’ plan followed by several months a heavy amount of selling by other Herbalife insiders. Investors may simply have decided that too many people in the know at the firm wanted to lighten their holdings, which is often taken as a hint that a stock is a better sell than a buy. The shares rose $1.25 to $19.13 on Nasdaq on Tuesday, still way down from $36.88 earlier this year.
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Dow Divergences
Most of the highest-priced shares in the 30-stock Dow Jones industrials also have made big percentage moves this year, while the lowest-priced shares have either fallen further or barely advanced. The high-priced stocks’ gains are feeding the index’s surge. Performance of the five highest- and lowest-priced Dow stocks:
Highest-Priced
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Tues. 1997 Stock close change IBM $146.00 --3.6% Philip Morris 139.63 +23.6 Procter & Gamble 126.50 +17.5 DuPont 113.25 +20.3 J.P. Morgan 108.75 +11.4
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Lowest-Priced
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Tues. 1997 Stock close change Bethlehem Steel $8.63 --2.8% Westinghouse 19.25 --3.2 Woolworth 22.38 +1.7 AT&T; 36.13 -16.7 Intl. Paper 42.50 +4.9
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Source: Times research
