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The Unpopular Truth About GE’s Dow Dismissal

Let us all pause for a moment of silence…

General Electric (NYSE: GE), last of the original members of the Dow Jones Industrial Average (DJIA) at its inception back in 1896, was unceremoniously booted out of the Dow this week.

The reason?

A lack of performance. GE is a dog that can’t hunt!

The odd thing is another Dow dog, Walgreen Boots Alliance (NASDAQ: WBA), which isn’t setting the stock market afire replaced GE.

Contrarian investors should rejoice.

This is a bright green BUY signal for beaten-down shares of GE!

File this tale under “truth is stranger than fiction,” because here’s the rest of the story…

Source: Bloomberg

First, there’s no doubt about GE’s mangy status.

The stock is down 26% so far in 2018, by far the worst performer in the Dow. And that’s on top of a 45% plunge in GE shares last year.

What a mutt!

But WBA as a replacement is a curious choice by the Dow Jones index committee.

The company, created a few years ago in the merger of giant U.S. drugstore chain Walgreens, and Europe’s Alliance Boots international pharmacy business, hasn’t exactly been a star performer.

In fact, WBA shares are down 11% year-to-date, following a decline of nearly 15% in 2016 and 2017. That performance, or lack thereof, would have landed WBA shares in the Dow doghouse!

This may be the first time a Dow replacement stock has entered the average as a dog already.

Source: Bloomberg

Walgreens has struggled with competition in both its retail and wholesale pharmacy businesses. And the competitive landscape is about to get even more fierce with Amazon rumored to soon enter the fray.

As for GE, about 40% of its shares are held by retail investors, and here’s the good news for all those mom & pop stockholders. After being expelled, ex-Dow stocks typically go on to outperform the DJIA over the next year.

The last Dow swap was in 2015 when Apple (NASDAQ: AAPL) replaced AT&T (NYSE: T) in the index.

Tired old “Ma Bell” went on to gain 15% over the next 12 months, while the DJIA itself fell 2%.

In 2013 there was a major overhaul at the Dow dog pound as three stocks; Alcoa (NYSE: AA), Bank of America (NYSE: BAC) and Hewlett Packard (NYSE: HPQ), all got the boot.

AA promptly became a best-in-show pedigree, as its shares zoomed 96% higher over the next year. HPQ found the scent too, with the stock soaring 73% over the next 12 months!

So if you’re one of the many retail investors who already owns GE, and wishing you didn’t, take heart. History says better days are coming.

And if you don’t own the stock already, this Dow decision could be a buy signal for GE shares.

Here’s to growing your wealth,

Mike Burnick

Mike Burnick
Chief Income Expert, Mike Burnick’s Wealth Watch

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Mike Burnick

With over 25-years of professional investment experience, Mike Burnick was a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. Mike joined Weiss Research in 2002 as an analyst and writer, and in 2008 was named Director of Research and Client Communications at Weiss Capital Management, where he assisted...

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