Stocks that leave the Dow tend to outperform after their exit from the average, history shows

Published Sat, Aug 29 20208:15 AM EDT

Exxon Mobil , Pfizer and Raytheon Technologies are on their way out of the Dow Jones Industrial Average . But their exit from the blue-chip club may actually bode well for investors, based on historical analysis. On Monday , S & P Dow Jones Indices announced that Salesforce , Amgen and Honeywell will replace Exxon, Pfizer and Raytheon in the Dow average. The changes will take effect on Aug. 31, the same day as Apple's stock split, and will mark the first time the Dow experienced three simultaneous stock replacements since 2013. Data compiled by Ned Davis Research showed stocks that leave the Dow have, since 1972, averaged a 12-month gain of nearly 17.5% after being kicked out of the 30-stock average. Their replacements, meanwhile, have averaged a gain of 10% in their first year as Dow members. Gains like those for the current outbound Dow members would be more than welcome by their investors after recent lackluster stock performances. Exxon and Raytheon have taken a beating this year, tumbling 41.7% and 29.5%, respectively. Pfizer is down more than 3% for 2020. In turn, two of the three new incoming Dow members — Salesforce and Amgen — are up for the year and are outperforming the 30-stock average. Salesforce is up more than 66% in 2020 while Amgen has gained 5%. Honeywell, however, is down 4.8%. There have been notable instances in which ousted Dow members catch fire, perhaps as the removal marks a bottoming in negative sentiment. Bank of America , for example, was up more than 19% in the 12 months after getting kicked out of the Dow, according to Bespoke Investment Group. Alcoa , which was removed from the average at the same time as Bank of America in 2013, saw its shares nearly double in value over that one-year period. Matt Lloyd, chief investment strategist at Advisors Asset Management, said investors may be snapping up removed Dow stocks as their valuations are usually more attractive when they're kicked off the average, hence leading to a stronger performance after their removal. "These stocks are already selling off when they are leaving the index," he said. To be sure, there have been some Dow members that continued tanking even after being removed from the average. General Electric — once the oldest Dow component — dropped more than 20% a year after it was replaced by Walgreens Boots Alliance, data from Bespoke Investment Group showed. That switch happened in June 2018. General Motors , meanwhile, fell 44.3% in the year after its removal from the Dow. The automaking giant was replaced by Travelers Cos. in June 2009. Still, on a median basis, "stocks that get removed from the index tend to do better than the stocks that are added," Bespoke said. Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

An Exxon Mobil gas station in Chicago.

Getty Images

On Monday, S&P Dow Jones Indices announced that Salesforce, Amgen and Honeywell will replace Exxon, Pfizer and Raytheon in the Dow average. The changes will take effect on Aug. 31, the same day as Apple's stock split, and will mark the first time the Dow experienced three simultaneous stock replacements since 2013.