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Dow Jones announced that for the first time since April 2004, it has made changes to the list of stocks that make up the Dow Jones Industrial Average. As of February 19, 2008, the 30 stock average no longer includes tobacco company Altria (MO) nor industrial and technology company Honeywell (HON). Marcus Brauchli, the managing editor of The Wall Street Journal who oversees the makeup of the Dow 30, said that these changes resulted from the announced spin-off by Altria of its international business, Philip Morris International, leaving it a much smaller company in terms of revenue and profits from the domestic tobacco business.

He also said that the average needed maintenance to insure that it fully reflects the stock market as founder Charles Dow intended. Mr. Brauchli felt the averages needed greater representation among financial and energy companies.

This has some interesting implications for the future performance of the Dow Jones Averages going forward. The index will now be much more dependent on the performance of the financials and energy stocks than it has been in years past. The energy sector has been strong, while the financial sector has been plagued by mortgage problems and credit losses. Replacing Altria and Honeywell will be Bank of America (BAC), the largest bank in the United States and Chevron (CVX), the second largest oil company. The largest energy concern, Exxon Mobil, is already included in the average. Bank of America becomes the fifth financially oriented company in the Dow Jones.

What impact will this have on the Dow Jones 30?

A look at my PortfolioGrader Pro stock-ranking tool reveals some other interesting information about the new makeup of the Dow Jones 30. As I write this in early March, Honeywell and Altria both receive an overall A grade, the best possible ranking. They both have good grades across all eight fundamental variables and show signs of persistent institutional buying pressure. Last year Honeywell was the best overall performing stock in the Dow! Chevron scores an overall A grade and shows buying pressure but scores poorly for sales and earnings growth. Bank of America has an overall grade of D, shows slowing buying pressure and scores very poorly across most of the fundamental grades.

In some ways it appears that the changes have weakened the fundamentals of the Dow, at least in the near term. In the past the Dow Jones has been changed when one stock had slipped to a level of sales and earnings growth that it was no longer representative of the overall economy. So for the first time that I can recall, stronger stocks have been replaced by weaker performing ones!

Bottom line: You ought to know that in the long run the Dow's recent changes may reflect the overall make up of the economy. But based on PortfolioGrader Pro rankings, it may mean the Dow is a little weaker than the rest of the stock market in the short and intermediate term.

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