One stock looks primed to see the biggest benefit from being added to the Dow Jones Industrial Average this week.
The Dow Jones Industrial Average announced its biggest shake-up since 2013 this week.
Exxon (NYSE: XOM), Pfizer (NYSE: PFE), and Raytheon (NYSE: RTX) are out, and Salesforce (NYSE: CRM), Amgen (NASDAQ: AMGN), and Honeywell (NYSE: HON) are in.
Since the big switch, all three new stocks to the Average are up, with Honeywell and Amgen shares both up around 6% and Salesforce shares up nearly 32% over the last week.
But of the three, options traders are betting Amgen could ultimately be the biggest winner.
“It traded nearly seven times the average daily call volume, a big uptick on the back of that news,” said Optimize Advisors CIO Michael Khouw. “The most active contracts were the 250-calls that expire at the end of this week, Aug. 28. One buyer paid $2 for 700 contracts on a total of about 3,000 that traded.”
These contracts break even at $252, and the stock closed at $252.81 on Thursday. With the stock breaking above that level, executing these contracts will allow the buyer to own, and profit on, any further upside that could come after the stocks officially join the Dow next week.
Joule Financial chief investment officer Quint Tatro said that being added to the Dow can bring a company “great credibility,” which will benefit Amgen.
“Out of the names that have been added just recently, we like Amgen from a valuation standpoint,” Tatro said. “Investors, if they’re not trying to just buy a passive index like that Dow,… could look at this particular stock.”
“I think Amgen will be a long-term buy here,” Tatro added. “I think it continues to go higher.”
Aside from Amgen, Honeywell, and Salesforce, Ascent Wealth Partners’ Todd Gordon said that if the Dow wants to make any more changes, it should ditch one stock in particular.
“It’s probably easier to suggest what should come out of the Dow, and that’s Walgreens (NASDAQ: WBA),” Gordon said. “It was an important 20th-century company, but not so much in the 21st century.”
Gordon argues that, for Walgreens, “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. There’s only 30 slots [in the index]. Each one should contribute toward sort of being reflective of the modern economy, and a drugstore just doesn’t do it.”
So what stocks could take Walgreens’ place? Gordon says Amazon (NASDAQ: AMZN) or Google-parent Alphabet (NASDAQ: GOOGL, GOOG) look like the best candidates.
“We own both in our strategy,” Gordon said of the stocks, adding that they are “too important to the consumer to not be in the average.”
Gordon added, though, that both Amazon and Alphabet might have to issue a stock-split a la Apple (NASDAQ: AAPL), which recently announced a 4-for-1 stock split.
“They too would have to spilt [their stocks] to not have a big impact, and maybe Apple’s move will sort of get that game going,” Gordon said.