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Why Apple Should Replace Cisco in the Dow


I have nothing against Cisco (CSCO), the company or its products, for that matter. I do have a problem with the stock still being a part of the Dow Jones Industrial Average (^DJI), however.

It would be nice if the 30 stocks in the Dow were kept a little more current and reflective of today's economy. If that were the case, maybe the Dow would be a lot higher than 13,000 at the current time.

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It is bad enough that Cisco is so widely held and talked about in the financial press so often, but does it have to continue to be representative of the state of our nation's economy? I suppose most money managers like me would like to see duds like Cisco and Alcoa remain in the Dow -- it makes it easier for us to beat the index -- but I would much rather see fresher, more vibrant companies represent us.

We don't send our mediocre golfers to the Ryder Cup. We don't send our average athletes to the Olympic Games. Why then can't we pick a better team to represent corporate America?

What is wrong with Cisco you say? This $90 billion company helped take us from mainframe computers, to personal computers, to local area and wide area networks. Where is Kaypro? Where is Novell? I am not saying that Cisco's technology is obsolete, but it is obvious that its best days are far back in the rear-view mirror.

Let's look at the returns that the stock has delivered to its investors over the years:

Data from Best Stocks Now App

Over the last 10 years, the stock has underperformed the S&P 500 (^GSPC). While the index was delivering average annual total returns of just 2.6% per year, Cisco was dishing out 1.1% average returns. This is like a turtle passing a snail on the highway.

Over the last five years, the stock has really helped out money managers in trying to beat the Dow. Cisco has been going backwards by 8.2% per year, while the S&P 500 has been going in reverse by a much more palatable 1.9% per year.The markets have made a pretty good recovery since that apocalyptic 666 number that the S&P finally landed upon back in 2009. Over the last three years, the market has been coming back at an above average 13.5% annual clip-not Cisco! Cisco has even been going backwards in a good market! Cisco has been losing another 2.9% per year over the last three years for its investors.

What more does a stock need to do to become not so widely-held anymore? I talked with a listener of my radio show today. He told me that he has heard me bad-mouthing the stock, Cisco, for a long time. In fact, I have written many articles about the stock; here is just one. This gentleman went on to tell me that his money manager bought some more Cisco for him before yesterday's mediocre earnings report.

If you look at your portfolio and see Cisco in it, you may want to read my article on stocks of yesteryear. Why do names like General Electric (GE), Cisco, Merck (MRK), etc., etc., continue to litter almost every wire-house firm's portfolios? No wonder investors are leaving such firms in droves and moving to discount brokers!

What would you replace Cisco with? More relevant companies that better represent stocks of today as opposed to stocks of yesteryear. I can't think of a better example than Apple (AAPL). It is now the largest publicly traded company in America. Check out the returns of Apple during the same time periods as that of Cisco:

Data from Best Stocks Now App

Now, that is more like it? I am sure that some mathematician can do the math and figure out where the Dow would be today, had Apple and not Cisco been a member. I would be happy with the last five years when Apple began to really innovate and passed Cisco like it was standing still.

Is it too late to add Apple to the Dow? Are its best days are behind it? Oh, I think Apple still has quite a bit more room to the upside. Consider that the stock is currently trading at a 10.6 forward price-earnings ratio and is expected to continue growing its earnings by 19.7% per year over the next five years. Even I can do the math on that! The current PEG ratio is just 0.54.

Data from Best Stocks Now App

If I just take Apple's earnings estimate of $53.88 per share next year and extrapolate them out at 19.7% per year for five years, I come up with some pretty lofty numbers. Furthermore, when I apply a reasonable multiple to those earnings, I come up with a five-year target price that is significantly higher than where the stock is trading today.

I think the Dow will fare much better in coming years carrying Apple on the team than Cisco. There are only 30 spots on our roster, shouldn't they be the best?

Disclosure: At the time of publication, Bill Gunderson was long AAPL and did not own CSCO.

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