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The Dow should consider swapping Walgreens out for Amazon or Alphabet, trader says after shake-up

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As the Dow changes its stripes, these stocks could benefit, traders say

Could the Dow's recent shake-up bring about even more change in the 124-year-old index?

If it does, there's one particular swap that could be worth considering, Todd Gordon, managing director at Ascent Wealth Partners, told CNBC's "Trading Nation" on Tuesday.

"It's probably easier to suggest what should come out of the Dow, and that's Walgreens," Gordon said. "It was an important 20th-century company, but not so much in the 21st century."

Calling attention to a chart of the stock relative to the Dow Jones Industrial Average, Gordon noted that the two diverged in a big way in 2014 and haven't looked back as brick-and-mortar retail continued to be disrupted by e-commerce.

"It's going to be tough to grow in this new environment and, with a low share price, it won't be a big impact on the Dow," he said of Walgreens. "There's only 30 slots. Each one should contribute toward sort of being reflective of the modern economy, and a drugstore just doesn't do it."

Amazon or Google parent Alphabet could be good substitutes, Gordon said, pointing to Amazon's long-term uptrend.

"We own both in our strategy," he said of Amazon and Alphabet, calling them "too important to the consumer to not be in the average."

"They too would have to split [their stocks] to not have a big impact, and maybe Apple's move will sort of get that game going," he added.

Quint Tatro, chief investment officer of Joule Financial, agreed with Gordon's criticism of Walgreens, saying the stock was a "laggard" and that the Dow's 2018 decision to add it to its index was "considerably worthy of revisiting."

Still, being added to the Dow can bring a company "great credibility" and one of its newest entrants could benefit from that, Tatro said in the same "Trading Nation" interview.

"Out of the names that have been added just recently, we like Amgen from a valuation standpoint," he said. "Investors, if they're not trying to just buy a passive index like the Dow, ... could look at this particular stock."

S&P Dow Jones Indices announced Monday that Amgen, Salesforce and Honeywell would replace Pfizer, Exxon Mobil and Raytheon Technologies in the major average effective Aug. 31.

With a relatively fair valuation of 13 times earnings per share and five times sales, less debt than the average biotechnology company and a nearly 3% dividend yield, Amgen makes the best long-term investment out of the three newcomers, Tatro said.

"I think Amgen will be a long-term buy here. I think it continues to go higher. Whether Salesforce and Honeywell [will], I'm just not sure. I can't begin to guess about those," he said.

Disclosure: Ascent Wealth Partners owns shares of Amazon and Alphabet.

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