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The word bellwether comes from the Middle English term for the lead ram of a domesticated flock, on whose neck a bell was hung. Today, bellwether is often applied to the stock of a company that is widely viewed as a leader in its industry. The performance of a bellwether company is thought to portend the results of other companies within that industry and, often, the economy as a whole due to the large size and influence of these companies. As a result, knowing and keeping track of bellwether companies is very important from an investment standpoint.
Alcoa (AA) has long been used as a barometer for market performance. Alcoa is the third largest producer of aluminum in the world, behind Russia’s RUSAL and the U.K.’s Rio Tinto PLC (RTP), and is traditionally the first large company to report earnings each quarter. As a result, investors typically look to Alcoa to start off earnings season on a positive note. Companies in many industries, including the aerospace, automotive, beverage, commercial construction, and gas sectors, use aluminum produced by Alcoa and, thus, demand for its products is a good gauge of the performance of companies in those businesses. As a result, a strong earnings performance by Alcoa is considered a bullish signal for the stock market overall.
The securities that are considered bellwether’s can change, however, as the economy and the fortunes of individual companies change. For example, General Motors Corporation was seen as a leader of the U.S. economy for many years. However, over recent decades the company gradually lost influence to technology companies with the rise of computers and the Internet. The decline was worsened by weakness in the automotive industry in general around the start of the 21st Century and the financial crisis that began in 2008. These events eventually led to General Motors filing for Chapter 11 bankruptcy protection in June 2009. The company sold most of its assets to a new company that was financed by the U.S. Treasury Department. This new company is now called General Motors Company, which is a smaller restructured version of the old General Motors Corporation. The new GM currently has no publicly traded securities, hurting, and perhaps eliminating, its status as a bellwether.
Some companies that can be considered bellwethers that investors may wish to trade include:
• Exxon Mobil (XOM): the largest company in the U.S. by market capitalization and the largest energy company in the world.
• Microsoft (MSFT): the world’s largest computer software maker.
• Apple (AAPL): the world’s largest manufacturer of consumer electronics.
• General Electric (GE): was once the largest company in the U.S. and is still a powerhouse with its large size and participation in a variety of markets.
• Wal-Mart Stores (WMT): the world’s largest retailer and an important barometer of consumer sentiment.
• Berkshire Hathaway (BRK/A): the largest investment manager in the U.S. and an important player in the property and casualty insurance market. Many view moves made by Berkshire’s Chairman and CEO Warren Buffett as important market indicators.
• Proctor & Gamble (PG): the U.S.’s largest manufacturer of household products.
• Bank of America (BAC): the largest bank in the United States.
• Wells Fargo (WFC): a close second to Bank of America in terms of market capitalization.
• JPMorgan Chase (JPM): one of the largest financial services companies in the U.S.
• Johnson & Johnson (JNJ): the largest maker of healthcare products in the U.S.
• International Business Machines (IBM): an important provider of business and technology services.
• Google (GOOG): the largest player in the Internet industry and the operator of the world’s most used search engine.
• Cisco Systems (CSCO): the leading supplier of networking products for computer systems.
• AT&T (T): the leading provider of telecommunications services in the United States.
• Pfizer (PFE): a major producer of pharmaceuticals.
• Intel (INTC): a leading manufacturer of integrated circuits for the computing and communications industries.
• Coca-Cola (KO): the world’s largest beverage company.