Cramer: Stocks dumped by the Dow—a shocking result

If a company is kicked out of the Dow Jones industrial average, should the stock be bought or sold? That was the question on Jim Cramer's mind on Friday, and he was surprised at what he found.

"You would think that being booted out of the Dow would be a death sentence for a given stock, but when you look at the performance of the last 10 stocks to have been kicked out, on average they have actually roared higher and performed much better once they were no longer a part of the venerable index," the "Mad Money" host said.

In the past eight years, there have been 10 stocks rejected from the Dow that were replaced by newer and sexier companies. The most recent exile was AT&T, which made room for Apple. Alcoa was replaced by Goldman Sachs, and Bank of America and Hewlett-Packard were shoved out by Nike and Visa.





"Despite what you might think, getting expelled from the Dow Jones industrial average is no longer a stock market death sentence." -Jim Cramer

The year before that, Kraft was kicked out to make room for UnitedHealth. In 2009 Citigroup was replaced by Cisco, and when General Motors went bankrupt it gave up its spot to Travelers. In the heart of the financial crisis in 2008, the Dow cut AIG loose and replaced it with Kraft, which was booted out only a few years later.

Earlier in 2008, Altria was kicked out to make room for Bank of America, and Honeywell was pushed aside for Chevron.

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In the year leading up to its removal, AT&T was up 3.5 percent, and it rallied 1 percent in the 10 months after being cut loose. Bank of America is up 9.8 percent since being chopped. Near the end of 2012 Kraft was expelled, and since then the company has broken itself up and had a portion acquired by Heinz, producing a 97 percent gain in total.

How could being removed from the most watched index on Earth be viewed more as a blessing than a curse?

Cramer explained that futures and ETFs create some very strange dynamics in the market that cause totally unrelated stocks to trade together because they are in the same basket.

Once a stock is kicked out of the Dow, it is no longer held hostage to the Dow futures traders who don't care about individual companies and are only interested in betting on the direction of the index.

Plus, once a stock is free of the index it will no longer be impacted by waves of index fund selling that can overwhelm a particular stock. This is significant, as index funds manage large sums of money. About a year ago index funds managed more than $2.1 trillion, and the number has become larger since.

Cramer found that if an investor waits a few days after a stock is kicked out of the Dow, historically they would have made money buying that stock and holding on to it for the next 12 months. The exceptions to this were AIG and GM during the financial crisis.

"Despite what you might think, getting expelled from the Dow Jones industrial average is no longer a stock market death sentence," Cramer said. (Tweet This)

These days, now that index funds and futures are king, there may be more benefits to not being part of the most visible index on the planet. It could actually be a terrific buying opportunity the next time a stock is dumped by the Dow.

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