Earlier today, the committee that oversees the Dow Jones Industrial Average (DJINDICES:^DJI) made its most extensive revision to the benchmark in nine years, switching out three existing Dow Jones Industrial Average (DJINDICES:^DJI) components in favor of three new entrants. The changes won’t take effect for another couple of weeks, but that didn’t keep investors from immediately starting a debate over whether the ejected stocks deserved their fate and whether the newcomers were the right picks to replace them.
Of the new stocks, Goldman Sachs Group Inc (NYSE:GS) is certain to draw controversy among mainstream investors who primarily turn to the Dow Jones Industrial Average (DJINDICES:^DJI) for their views on the health of the stock market. Some feel the investment bank has essentially abandoned its reputation for honesty and integrity after the financial crisis, so many Americans will see the Dow Jones Industrial Average (DJINDICES:^DJI)’s selection as rewarding a company which exiting executive Greg Smith said referred to customers as “muppets” to be taken advantage of for profit. With that in mind, does Goldman Sachs Group Inc (NYSE:GS) truly deserve to be in the Dow Jones Industrial Average (DJINDICES:^DJI)?
Delivering on fundamentals
If you only look at Goldman Sachs Group Inc (NYSE:GS)’s financial results, you’ll see an operation that has been incredibly successful in maintaining and growing its profits over the years. Despite a fiscal-year change that allowed it to push some losses into an “orphan month” in December 2008, the company’s official annual reports showed positive earnings throughout the years leading up to and following the financial crisis, and profitability has slowly risen back toward levels seen before the crisis.
A big bull market in stocks was just what the doctor ordered for Goldman Sachs Group Inc (NYSE:GS)’s prospects. In its most recent quarter, a combination of strong trading results and healthy investment-banking activity helped the Wall Street firm double its net income. Despite some headwinds from rising interest rates, Goldman Sachs Group Inc (NYSE:GS) has maintained long-term success in its proprietary trading operations, helping it earn a reputation for intelligence that has made it an industry leader.
Filling a financial void
One reason the Dow Jones Industrial Average (DJINDICES:^DJI)’s selection committee might have chosen Goldman Sachs Group Inc (NYSE:GS) was to remedy a long-standing issue the Dow has faced: a much lower exposure to financial stocks than the broader market has. Before the switch, financials were significantly under-represented within the Dow, making up just 11% of its total weighting compared to more than 15% in the S&P 500.
