Ahead of Changes, S&P Bullish on Dow ETF
The venerable Dow Jones Industrial Average is just a week away from some big changes.
On Monday Sept. 23, Alcoa (NYSE: AA), Bank of America (NYSE: BAC) and Hewlett-Packard (NYSE: HPQ) will be removed from the blue-chip index in the Dow's first changes since United Health (NYSE: UNH) replaced Kraft (NASDAQ: KRFT) last year.
Big changes for the Dow mean big changes for the nearly $12 billion SPDR Dow Jones Industrial Average ETF (NYSE: DIA). Of the three stocks entering the Dow, S&P Capital IQ only has a four-start Buy rating on Goldman Sachs (NYSE: GS). S&P Capital IQ equity analyst Ken Leon called Goldman "a market leader, and he sees improved performance leading to continued share repurchases," according to a new research note from S&P Capital IQ.
"Overall, Leon sees GS as one of the more attractive companies in which to invest in the global capital market, and he believes its investment banking capability remains best in class. He also views GS as having a keen focus on the capital markets and client servicing. Goldman Sachs has an S&P Quality Ranking of B+ and a Standard & Poor's Credit Rating of A-," according to the firm.
The Dow is a price-weighted index, meaning stocks in the index are weighted by price. As a result, assuming no significant price changes in the next week, Goldman will enter the Dow as the index's third-largest holding behind International Business Machines (NYSE: IBM) and fellow new entrant Visa (NYSE: V), according to State Street data.
"S&P Capital IQ equity analyst Sonia Parechanian likes Visa's business model, high level of cash flows and healthy balance sheet. She sees healthy payment volume growth ahead, given a U.S. economic recovery, aided by the secular trend toward non-cash payments and strong growth prospects in emerging markets. She is also optimistic about V's growth initiatives, including expansion in prepaid cards, mobile payments, money transfer, and e-commerce. However, she believes the shares offer limited upside potential from current levels," according to the note.
Visa earned a three-star rating from S&P Capital IQ. Nike (NYSE: NKE) joins Goldman and Visa as the new Dow members. Nike currently trades around $68, just ahead of Walt Disney (NYSE: DIS), which indicates the two companies will battle it out for Number 16 spot in the Dow.
S&P Capital IQ has an Overweight rating on DIA. While the Dow is an old, familiar index, it does not carry the same importance among professional investors as it once did. At almost $12 billion in assets under management, DIA is by no means smaller, but it is far smaller than multiple S&P 500 ETFs, the iShares Russell 2000 ETF (NYSE: IWM) and the PowerShares QQQ (NASDAQ: QQQ), the Nasdaq 100 tracking ETF, just to name a few.
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Disclosure: Author does not own any of the securities mentioned here.
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