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Should Dow boot GM?
With 50 percent stock plunge taking market cap to paltry $11B, is troubled GM still a 'major' stock?
December 21, 2005: 4:36 PM EST
By Chris Isidore, senior writer

NEW YORK ( - Does General Motors still belong in the exclusive Dow club?

The troubled automaker, whose stock has lost more than 50 percent in value this year, has cost the Dow about 160 points. Without GM, the index would be up more than 2 percent; instead, it's up less than 1 percent.

GM's percentage decline is more than twice that of the second biggest loser, Verizon Communications (Research).

And GM's market capitalization has fallen to about $11 billion, less than half that of the next smallest Dow stock, Alcoa (Research). GM, with plans to sell its credit unit, GMAC, is set to be even smaller.

GM (Research) has been plagued by declining sales and market share and a downgrade in its bonds to junk status. Though GM officials have downplayed the risk of bankruptcy, Standard & Poor's is on record saying the prospect is not far-fetched.

Wednesday the stock fell to another 23-year low of $18.99 before closing at $19.05, down another 80 cents or 4 percent on the day.

The Dow components are selected by the editors of the Wall Street Journal, which won't comment on speculation about future changes in the index. But Rich Moroney, editor of Dow Theory Forecasts, said that while the paper doesn't make moves frequently or lightly, removing GM is a possibility.

"They've kicked companies out just because it's at financial risk," said Moroney. "In the early years it was a case of a company that was going to zero (stock value) and they don't want that. It does seem premature to do it now."

Other big losers on the Dow

The Dow was created in 1896 to give a snapshot of the nation's key industries and companies outside of transportation -- it is meant to be a bellwether for the economy, not a roster of the nation's best-performing stocks.

GM has been a member of the benchmark blue chip stock index continually since 1925, through dozens of component changes and hits to its stock price that came with oil shocks, labor woes and recessions.

Even a 50 percent drop in stock value doesn't warrant expulsion. In 2002, two of the then-newest components of the index, Intel and Home Depot, each lost more than half their value.

"I'm not one of the editors of the Wall Street Journal, but I want to use the Dow as a market leading indicator, and for that you want a group of highly influential stocks, even when the news is bad," said Jeffrey Hirsch, editor of The Stock Trader's Almanac. "GM still represents a good part of the auto industry."

In addition, the threat of bankruptcy alone doesn't necessarily lead to action. The Dow Transportation Index didn't announce a decision to drop Delta Air Lines and Northwest Airlines until Sept. 14, the day both airlines filed for bankruptcy, even though both filings were telegraphed to markets well in advance.

The Dow industrial average has had at least one component in bankruptcy -- Texaco in 1987, when an $11 billion court verdict against it prompted it to file for protection as a defensive strategy. Texaco stock continued to trade throughout its reorganization, though, and its stock did far better that year than GM has done this year.

There is also a question of what would replace GM if it were dropped from the index. The only other major U.S. automaker, Ford Motor Co. (Research), is struggling with many of the same problems as GM.

But Moroney said maybe it's time that the Dow no longer has an auto stock, even if auto sales represent about 20 percent of total U.S. retail sales.

"If you look at the market caps of GM and Ford, it's not a very significant sector," he said. "In terms of the stock market, it's nowhere near as important as it once was. I personally think it's worth watching, but I don't think it's a stretch to have an index that would not include autos."

Moroney said he doesn't believe that one of the major overseas automakers, such as DaimlerChrysler (Research) or Toyota Motor (Research), should be added to the index, which has never had a foreign stock. "I think it would muddy the waters too much for what the Dow is trying to represent," he said.

But German-based DaimlerChrysler has most of its operations and revenue in North America. And Hirsch said he'd be much more comfortable with an overseas automaker in the Dow than an auto-free Dow.

"It is coming," he said of the idea of a foreign Dow component. "This whole globalization situation is making that more and more likely."

He said he doubts that GM would be replaced as long as it is still the world's leading automaker, but Toyota could claim that title from GM as soon as 2006.

"That would be the time to replace it, not before," said Hirsch.

For a look at whether GM stock has been battered enough to make it a good investment, click here.  Top of page

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