Joining the famous Dow Jones Industrial Average is a prestigious honor. The 30 constituents are the crown jewels of what America offers in stock investments. While not all of the biggest companies are part of the Dow for different reasons, it is safe to say that from an international, outside perspective the Dow is seen as the trophy-collection, containing most of the key blue chips. Recently, Nvidia joined this group. While it could be understood as the final proof of Nvidia’s quality and undisputed standing, historically speaking, this is a clear red flash – a warning that the party could be over soon.
Summary and key takeaways from today’s Weekly
– An inclusion into the Dow Jones sounds like a major milestone, but beware.
– Cyclical stocks seem to be added close to their peaks and thrown out near their bottoms.
– While there are examples of good switches and successful runs after an inclusion, this is at best a mixed bag and at worst a bad omen for Nvidia. History does not repeat, but…
There are mainly two groups of investors regarding the stock of Nvidia (ISIN: US67066G1040, Ticker: NVDA): Those who fell in love with it and don’t care about valuation or external news and those who hate it, calling it overvalued since long.
For now, the first group has been the clear winner.
I belong to the latter camp as I’m seeing Nvidia as an extremely hyped phenomenon that occurs from time to time, making a few people rich and many poor, namely those who joined the party late. I am a bit afraid that people who jut started investing declare the stock of Nvidia a must-own and idiot-proof investment.
Every time I see someone on Twitter posting their portfolio sizes, bragging with Nvidia, I feel more and more that the top cannot be that far off.
There are no monopolies or market leaderships that endure forever without any kind of competition. Every state-of-the-art technology sooner or later has seen a disruption and / or a leading company drunk from their own success has started to become complacent and mismanaged to lose its position.
History does not repeat, but it rhymes.
There’s no denying that “Nvidia is overvalued” has been around not just for weeks, but even months and quarters. Usually, over-exaggerations tend to last longer than many expect. It is painful to watch the overvaluation becoming even more extreme and the stock to rise from high to high, proving doubters like me to be wrong.
It might sound completely insane and unserious, however, with the inclusion of Nvidia into the prestigious Dow Jones index in early November 2024, there’s a fairly good chance that we have finally reached the high-point.
It is not my sheer gut feeling which of course could be completely off – so far this clearly has been the case, I am honest and transparent.
There’s a very interesting historical pattern many investors are not aware of.
With an inclusion into the Dow Jones index, historically speaking more often than not a peak was reached. What followed was not an era of glory, but a rude awakening with a turning point, leading to massive corrections or in the worst case even obsolesce of the celebrated newcomer. Even if the underlying business continued to grow, shareholders not necessarily had reasons to celebrate for years to come, if at all.
At the same time, many of those companies that were ditched and downgraded, suddenly started to outperform massively.
What sounds very counterintuitive is as surprising as indicative of what might be in the cards for everybody’s darling Nvidia.
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Doom and gloom or the final nail in the coffin?
The Dow Jones Industrial Average or in short also called the Dow Jones (or simply just the Dow), is the prestigious gold-standard stock index of the US.
It does not contain the 30 biggest companies – whether by market cap, trading volume, sales or whatever metric – but a collection of reputable and in most cases internationally well-known companies. It might be a bit over-exaggerated to call them the trophies as not every company fits into this category, but it is likewise not completely wrong.
One or the other will argue that the S&P 500 is the go-to index, offering a broader cross section of America’s economy.
This is debatable.
However, what is not debatable is that the S&P 500 despite including several high-profile names which are not constituents of the Dow like
- Tesla (ISIN: US88160R1014, Ticker: TSLA)
- Alphabet (ISIN: US02079K3059, Ticker: GOOGL)
- Meta (ISIN: US30303M1027, Ticker: META)
- Broadcom (ISIN: US11135F1012, Ticker: AVGO)
- or the smaller B class of Berkshire Hathaway (ISIN: US0846707026, Ticker: BRK.B)
is also carrying around lots of ballast in the form of low-profile companies and artifacts of the past or such that are not even well-known outside of America. And not every company stood the test of time for long enough.
This cannot be said about the Dow Jones’ selection as it is harder to join this index, because only 30 spots are available.
You won’t find any emerging small-cap growth story there.
Many argue that the Dow is antiquated, not offering a true picture of the balance of power in the US economy.
While certainly true for the period where the big tech stocks started their massive rally, this circumstance started to change in the recent past as one or the other old-economy company was exchanged for names like amazon (ISIN: US0231351067, Ticker: AMZN), salesforce (ISIN: US79466L3024, Ticker: CRM) or just recently Nvidia.
While still not perfect as many big names remain missing, definitely more realistic.
Another point of criticism is that contrary to the S&P 500, the Dow’s constitutes are not market-cap weighted (on a free float adjusted basis). In fact, the highest nominal share price is the deciding factor. The higher the price of a stock, the higher its weighting in the Dow Jones – no matter the entire market cap.
Below is the current line-up of the Dow Jones.
I marked the three biggest companies by market cap which obviously are Nvidia, Apple and Microsoft. They only qualify for the ranks #22, #15 and #3. Nvidia and Apple as the two biggest and all three being much larger by market cap than what follows after them being so lowly-ranked makes definitely the impression that this rating is a bit odd.
Furthermore, the financial sector has a higher weighting (more names and higher ranked) than technology – hardly representing the reality.
One reason is that only companies with a single share class are allowed to be included in the Dow. This automatically leaves the door closed for companies like Alphabet, Meta and Berkshire.
Prior to their inclusion, amazon and also Nvidia did big stock splits of 20-1, respectively 10-1, in order not to be the 800 pound gorilla in the room. Without its split, for example amazon would be trading for 4,000 USD apiece today. The hypothetical (and not realistic) result would be a weighting of roughly 35%.
You see, there are valid arguments for both camps.
Let’s now discuss the core topic of today’s Weekly which is why Nvidia’s recent inclusion in early November 2024 should not necessarily be a highly celebrated event. Using history as a preceded, this event could very realistically mark the top of Nvidia’s high-flying phase.
I am deliberately a bit on the provocative side.
However, at the end of this article, I am pretty sure many readers will have their “aha moment”. Not all data points will be perfect and ultra-precise, but I guess what counts is the big picture and the tendency, respectively the historical precedent.
Let’s have a look at those names that entered and left the Dow Jones over the last quarter-century, starting with the reshuffle in November 1999, close to the peak of the Dotcom frenzy.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Microsoft (+806%) | Chevron (+276%) |
| Intel (–41%) | Sears Roebuck (bankrupt) |
| Home Depot (+685%) | Union Carbide (today part of Dow Inc.; no long-term chart available due to merger with and demerger from DuPont) |
| SBC Communications (today: AT&T; –56%) | Goodyear Tire and Rubber (–74%) |
The picture here is a bit mixed due to Microsoft and Home Depot having become multi-baggers until today.
But two strong losers in the form of the freshly included Intel (ISIN: US4581401001, Ticker: INTC) and AT&T (ISIN: US00206R1023, Ticker: T) come to the surface.
Who’d have thought after 25 years?
While AT&T is debatable, in the case of Intel which comes very close to what Nvidia constitutes today in terms of market position, strength and perceived competitive advantages, the parallels are frightening. Intel back then was the undisputed CPU producer without any serious competition. The future belonged to it and no one came even close to rival it.
Many prefer to compare Nvidia today to Cisco (ISIN: US17275R1023, Ticker: CSCO) and its role as the enabler and pioneer of the internet. However, Cisco wasn’t included into the Dow until 2009.
Today, Intel is not only a shadow of its former self, but the company is in serious trouble. My guess as I had posted on Twitter is that sooner or later it will even have to be bailed out due to its high debt load and what currently looks like a failed transition that is only burning cash while the core business is suffering from its lost technological leadership.
You can see on the chart above that it took Intel – measured by eye – almost 20 years to reach the point of their inclusion into the Dow Jones index. This was not even the all-time high which by the way was never reached again or breached.
In the case of Microsoft, which shines today, it took them not less than 15 years to see the point of the inclusion – which also was not the top during the dotcom era.
On the other side, the ditched Chevron (which came back in 2008 when oil was at its all-time high) despite first suffering from low energy prices, did very well over the long-term. After the drop out, but also until today.
In 2003 only name changes occurred, that’s why we’re skipping that and now look at the reshuffle from 08 April 2004.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| American International Group (AIG; –95%) | AT&T (–6%) |
| Pfizer (–34%) | Eastman Kodak (bankrupt) |
| Verizon (+13%) | International Paper (+35%) |
From 2004, we can see that of the newcomers maybe with the exception of Verizon (ISIN: US92343V1044, Ticker: VZ) which has been paying big dividends, there’s hardly anything positive to say about the stock picks.
American International Group or in short AIG (ISIN: US0268747849, Ticker: AIG) imploded during the financial crisis a few years later and didn’t recover until today.
If you look closer, you will even see that the inclusion occurred at the top with no new high thereafter.
From those kicked out, nothing big to comment on.
Next stop, 21 November 2005. However, only a name change.
Next, 19 February 2008 saw two changes.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Bank of America (+18%) | Altria (+ c. 150%*) |
| Chevron (+86%) | Honeywell (+298%) |
Here, it becomes interesting again.
The newly joined Bank of America (ISIN: US0605051046, Ticker: BAC) and Chevron (ISIN: US1667641005, Ticker: CVX) both were included close to their tops, only to see their stocks crash over the subsequent years.
Until today, both recovered again and crossed their former inclusion-prices. Factoring in dividends, it looks even better. But this was not an easy-sailing trip and again a clearly pro-cyclical at-the-top inclusion.
*regarding Altria (ISIN: US02209S1033, Ticker: MO), the inclusion happened before the spin-off of Philip Morris International (ISIN: US7181721090, Ticker: PM). Post spin from the low, the price performance without dividends was around +150%. Including dividends much more.
And Honeywell which was also dropped, did very well until today.
The next round was just half a year later on 22 September 2008 when AIG was kicked out again in favor of Kraft Foods, which is today part of Kraft Heinz (ISIN: US5007541064, Ticker: KHC). AIG is up +20% over these 16 years, while for Kraft Heinz I can only find a chart dating back until 2012. The stock is down by 32% since then.
Not so important, but again showing it would have been better not to switch.
On 08 June 2009, the next round was due.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Cisco (+188%) | General Motors (bankrupt; then +66% since relisting in 2010) |
| The Travelers (+504%) | Citigroup (+98%) |
Here, despite the drop-outs having positive performance numbers (in the case of GM looking from the reemergence), the newcomers did much better.
On 24 September 2012, only one change happened. Kraft Foods dropped out and United Health (ISIN: US91324P1021, Ticker: UNH) joined. This was a good decision as UNH surged by +969% – before dividends.
Next one, 23 September 2013.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Goldman Sachs (+271%) | Alcoa (underwent separation and spin-off later, no chart since then available) |
| Nike (+108%) | Bank of America (+236%) |
| Visa (+542%) | Hewlett-Packard (+73%) |
Maybe with the exception of Bank of America, this looks like a good change. However, compared to the other two financials, BAC underperformed.
On 19 March 2015, the next reshuffle took place, this time with the inclusion of Apple (ISIN: US0378331005, Ticker: AAPL).
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Apple (+615%) | AT&T (–31%) |
Not much to comment on; well done.
In September 2017, Dow Chemical and DuPont merged into DowDuPont which later separated into three pieces again. I’ll leave it with that.
This one is interesting, 26 June 2018.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Wallgreens Boots Alliance (–88%) | General Electric (+62%) |
A company in the midst of its crisis, GE (ISIN: US3696043013, Ticker: GE), was ditched for another that had seen its zenith already and was also on the decline. The difference: GE managed to come back with a ferocious turnaround while Walgreens (ISIN: US9314271084, Ticker: WBA) seems to be a dead fish.
Bad luck, bad pick.
The changes in April 2019 and April 2020 were only due to mergers, hence not interesting.
Then, on 31 August 2020, the before mentioned change towards more tech in the Dow started, albeit slowly.
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Amgen (+11%) | Pfizer (–34%) |
| salesforce (+19%) | ExxonMobil (+197%) |
| Honeywell (+38%) | Raytheon Technologies (today: RTX; +95%) |
On average, a clear picture. ExxonMobil (ISIN: US30231G1022, Ticker: XOM) was ousted at the bottom only to see a strong comeback in tandem with the price of oil. The newly included names did nothing to freak out about – over a period of four years.
And finally, two shake-outs this year, one on 26 February 2024…
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| amazon (+17%) | Walgreens Boots Alliance (–60%) |
Nine months is not much time to judge about stock investments. But Walgreens falling apart is telling. Good choice to switch.
… and the other on 08 November 2024:
| Inclusion + performance since then (without dividends) | Exclusion + performance since then (without dividends) |
| Nvidia (0%) | Intel (–8%) |
| Sherwin-Williams (–3%) | Dow Inc. (–6%) |
Not even two full weeks is definitely too little to comment on. But it looks like a change for more promising ideas.
What’s the bottom line from this overview?
First of all, there is no 100% bullet-proof scheme or rule. There are precedents for both, good switches and bad ones.
However, what has manifested in the back of my head after having gone through all these examples is that there seems to be a tendency of pro-cyclical picks where companies are included into the Dow either at the top of their own glory and / or at a cyclical top of the sector or even the entire economy. Regarding more economically sensitive areas like semiconductors, banks and oil have shown this impressively.
That’s why I am a bit afraid this could have been it for Nvidia.
For those arguing that Apple was already comparatively big when it entered the Dow only to see its stock rise massively: no one believed in Apple back then a good decade ago. At its low, the stock was valued at an enterprise value to free cash flow of 9x!
This is absolutely not the case with Nvidia, to the contrary.
Nvidia is hyped into the stratosphere and spots high valuation multiples, suggesting that pretty much is expected and already priced into the stock. Similar to what we have seen at the height of the dotcom bubble.
While there will certainly emerge voices who rightfully say that back then most companies weren’t profitable and those which were had even much higher multiples.
This is correct.
However, every cycle has an end. After an upswing comes a downswing.
Semiconductors of which Nvidia’s GPU chips are part of, operate in one of the most cyclical industries with among the most severe downswings. Weaker results with lower sales and margins lead to lower valuation multiplies.
This death spiral can send such stocks down easily by 50–80% from top to trough.
Look no further than at Nvidia itself.
It is not necessary that several years turn out to be bad. One really bad year is enough to shake out all the pundits who have never experienced a stock to go down more than 20%.
Also, it is unlikely that Nvidia will be given the playing field exclusively for them without any competition trying to get their hands on Nvidia’s share. Among the most promising in this regard is amazon (“your high margin will soon be mine”, or so) which is set to announce and unveil their own version of an AI chip next month.
The intro of this article reads the following:
Amazon.com Inc. (NASDAQ:AMZN) is preparing to introduce its newest artificial intelligence chips in December. His strategic move aims to leverage Amazon’s significant investments in semiconductors and reduce reliance on Jensen Huang’s Nvidia Corp. (NASDAQ:NVDA).
It seems to be more likely that we are entering times when customers become the worst enemies – namely competitors. Why should companies like amazon, Alphabet or Microsoft be charged excessively if they can develop with time their own chips, potentially fitting the own requirements even better?
Success is not a given – it might also take time.
Today, this seems stupid and unthinkable. A decade it ago, it was also unthinkable that Apple would ditch Intel entirely for their own self-developed chips. Today, no Apple device has any Intel chips anymore. Performance is up massively and energy usage has dropped.
That’s why the case for me is crystal-clear: I risk looking like an idiot with this in case Nvidia surges higher and higher.
But being an investor with a focus on risks and rewards as well as an interest for history, I have a good feeling that what I rote today has a chance of not being completely off in the future.
Conclusion
An inclusion into the Dow Jones sounds like a major milestone, but beware.
Cyclical stocks seem to be added close to their peaks and thrown out near their bottoms.
While there are examples of good switches and successful runs after an inclusion, this is at best a mixed bag and at worst a bad omen for Nvidia. History does not repeat, but…
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