Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Alcoa Inc (AA), Hewlett-Packard Company (HPQ): Why Bank of America Corp (BAC) Was Ousted From the Dow

Page 1 of 2

The swapping-out of three of the Dow Jones Industrial Average components for an equal number of new names came as a big surprise to many, and the first shake-up in almost 10 years for the venerable index. The news that larger-than-life companies Alcoa Inc (NYSE:AA)Bank of America Corp (NYSE:BAC), and Hewlett-Packard Company (NYSE:HPQ) no longer had what it takes to maintain presence on the Dow naturally begged the question: Where did these companies go wrong?

How companies make the cut

The methods used by the group that makes these calls, the S&P Dow Jones Indices Committee, aren’t entirely transparent, but they do abide by some basic rules. According to its website, the group usually considers a company for inclusion “only if it has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the sector(s) covered by the average.”

Bank of America Corp (NYSE:BAC)

Taking a look at Bank of America Corp (NYSE:BAC), I believe the area in which it was found wanting was that of reputation — an issue that has plagued the big bank for some time now.

Comparing the losers

The committee commented on the day of the announcement that the change had been decided upon because of the low stock prices of the three companies, as well as the need to diversity the index. For an index based upon price-weight, share price indeed matters. Put together, the three companies weigh in at just under 2.30% of the entire index, compared to International Business Machines Corp. (NYSE:IBM), which currently commands 9.43% all on its own.

In the growth department, Alcoa Inc (NYSE:AA) is a definite laggard, having lost 80% of its value since 2007. Both Hewlett-Packard Company (NYSE:HPQ) and B of A also lost much of their stock value over the past few years, although each had experienced growth as of late, with Bank of America Corp (NYSE:BAC)’s share price rising 70% over the past year, and HP’s moving up a respectable 27%.

But, the computer maker has had some serious problems recently, and the latest quarterly earnings report and commentary from management put to rest any hopes of forward momentum for the company, at least for the foreseeable future. Bank of America Corp (NYSE:BAC), with its Project New BAC, is all about whipping itself into shape, with the goal of focusing on its customers and investors.

A question of diversity

As far as diversifying the index is concerned, substituting NIKE, Inc. (NYSE:NKE) and Visa Inc (NYSE:V) for Alcoa Inc (NYSE:AA) and Hewlett-Packard certainly represents a change, but what about substituting Goldman Sachs Group, Inc. (NYSE:GS) for B of A? Replacing one bank with another doesn’t seem like a huge shift, even if the former is an investment institution.

Besides, if Alcoa Inc (NYSE:AA) and Hewlett-Packard Company (NYSE:HPQ) don’t represent the greater economy anymore, that doesn’t seem true of Bank of America Corp (NYSE:BAC), which, with both retail and investment units, seems more representative of the economy than its replacement.

B of A’s reputation precedes it

While the huge gains in Bank of America’s share price over the past year point to its popularity with investors, the rest of humankind seem to hold the bank in particularly low esteem. Time after time, as this piece by fellow Fool John Maxfield notes, B of A manages to wind up at the bottom of any given heap when it comes to scoring the positive aspects of banks. And, it’s not just customers who feel such disdain for the bank — even noncustomers despise Bank of America.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!