It’s tough being part of the U.S. stock market’s largest indexes. With thousands of individual stocks to choose from, if any one component isn’t performing, it’s simply replaced by something else. 🔀
In other words, everyone is replaceable. That’s the harsh truth that Walgreens is facing today after discovering Amazon is replacing it in the Dow Jones Industrial Average. 🔀
The pharmacy-chain stock replaced General Electric in June 2018, being announced on June 19th and taking effect on June 26th. General Electric had been one of the few remaining “original members” of the Dow when it was established in 1896 and a continuous member since 1907.
Unfortunately, Walgreens’ run didn’t last nearly as long, with it being booted less than six years after being added. And it’s being replaced by none other than Amazon on February 26th. Listen, we can’t say we blame the index providers. Undoubtedly, big tech’s reach is massive and represents a significant part of the U.S. economy, probably more than a struggling pharmacy chain.
However, Walgreens shareholders might be surprised to know that being kicked out of the Dow might actually be a good thing. Studies have shown that the stocks replaced in the index tend to have better forward returns than those that replaced them. 📝
For example, look at how General Electric and Walgreens performed after their switch. While both struggled, GE had a marginal edge for much of the period and has recently taken off. It doesn’t always work out this way, but it’s an interesting thesis to ponder as Amazon is added to the mix. 🤔
While we’re on the topic of giant companies, we need to quickly mention today’s mega-merger in the financial services industry. Capital One has agreed to acquire Discover Financial Services in a $35 billion all-stock deal. Shares of Discover surged, but some investors are not getting too ahead of themselves given the Federal Trade Commission’s (FTC) recent antitrust rampage. ❌
Lawmakers like Elizabeth Warren are already calling for regulators to block the deal, which is why skepticism around its ability to close remains higher. With that said, the theme of the market recently has been the big getting bigger. We’ll have to see if that continues tomorrow with Nvidia’s results. 🤷