There is a tug of war occurring on Wall Street between Old Economy and New Economy stocks. For over 100 years, the Dow Jones Industrial Average Index has epitomized the Old Economy. This changed last year with the addition of Home Depot, Intel, Microsoft and SBC Communications to the index and the deletion of Chevron, Goodyear, Sears Roebuck and Union Carbide.
Charles Dow introduced his index on May 26, 1896. It was composed of ten “smokestack” companies. Of the ten, General Electric was probably the only forward looking company. These companies actually produced tangible, touchable products. The successes of these companies were and still are measured by production efficiency. Historically efficiency is measured by traditional financial formulas. Today’s New Economy companies are producing intangible products. These companies are creating ideas and concepts to manage intangibles such as airwaves, technology, and global competition. Wall Street is struggling to define the financial formulas to measure companies that are producing intangibles.
New economy companies hire employees for their brains, not their manual dexterity. Creativeness and innovation is more important than mass production. Companies reinvest earnings in new ideas and concepts, not new machines. Characteristics that define New Economy Companies are: Globalization – a presence in worldwide markets; Communication – networking and creating brand identity; Innovation – creating and using new ideas with speed and agility; Technology – adapting new tools to maximize efficiency; and Vision – being in the right place at the right time and creating staying power.
There are many Old Economy companies, though, that have these characteristics and are transitioning to New Economy companies. These are recognizable names such as AMR Corporation (parent company of American Airlines), Avon Products, Disney, Lucent Technologies (an AT&T spin-off), Monsanto, and Schlumberger.
How does an investor take advantage of the tug of war between New Economy and Old Economy companies? A strategy that is pretty simple is the “Relative Strength 5 Theory.” This theory, developed by Dorsey, Wright & Associates, is based on the same tenets as the Dogs of the Dow Theory. The Dogs of the Dow Theory identifies the five Dow stocks paying the highest dividends. An equal amount of money is invested in each of the five stocks and is held for one year. At the end of the one-year period, changes are made to again reflect the five Dow stocks paying the highest dividends.
The New Economy Dow stocks are NOT rewarding investors with dividends but with strategies such as stock buy backs and stock options. These strategies tend to drive the New Economy stock prices higher. In the “Relative Strength 5 Theory” the first basis of selection is NOT dividends but relative strength, i.e., stocks that are performing better than the market. By eliminating the requirement that a stock must pay a dividend to be considered, every Dow stock has the opportunity to be included in the portfolio. There is one constant, thought, for investors, companies and Wall Street -rapid change.
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Before deciding whether these strategies are appropriate for your investment objectives and risk profile, please consult your financial advisor.
This article is published for general informational purposes. It is not an offer or solicitation to sell or buy any securities. Any particular investment should be analyzed based on its terms and risks as they relate to specific circumstances and investment objectives.
