Tuesday, May 12, 2009

Revisiting the DIA

DIA - Diamond Trust - Purchased 3/4/09 at 68.83, sold 5/1/09 at 81.80, +19%

I would never try to call a "market bottom" - rather the DJIA presented an attractive investment because of its often-ridiculed price-weighted methodology. The bottom 5 stocks in the DJIA (GE, BAC, AA, C, GM) could all have fallen to zero and the index would suffer only about 2.5%. Since I purchased shares, GE, AA and C have all announced positive news decreasing the likelihood of their common stocks being wiped out - then again, as these stocks recover their miniscule weights will not do much to move the index higher. At the top of the index are IBM(10%), then XOM and CVX(combined 14%), JNJ and PG combining for almost 11%, and McDonalds at 6%. JNJ and PG are both trading at multi-decade lows in terms of PE, and could double before reaching their average median multiple. Most of the top DJIA stocks are trading at PE's around 10. Balance sheets are flush, and interest-coverage ratios are extremely healthy. I thought the upside (+50%)for the DJIA was about five times the downside at this level (-10%.

Another boost for the DIA might be reverse stock splits. Recent positive news from GE, Citi and Alcoa (and I mean common stock "survival" positive news, not that they're out of the woods), while good, ultimately helps the DJIA very little because if they double and triple, they still have little effect on the index. I emailed John Prestbo at the Dow Indexes, and his response was "Certainly reverse splits would boost the weights of these companies in the Dow Jones Industrial Average. Were it within my power to do this, it would have been done already." Today on briefing I saw this headline - "Citigroup: Dow Jones Indexes says reverse split in Citigroup shares may reduce calls for eliminating it from Dow - Reuters." Now I don't know that a threat like that will work, but we shall see.

I took profits (early it appears!) simply because the index rallied so quickly. And as Todd at Minyanville says, "opportunities are made up easier than losses." I'll put money back into the DIA should it drift lower, but after this huge move I feel safer raising cash and keeping an eye out for great values.

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