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The following is an excerpt of Samir Gibara's letter to shareholders in Goodyear's 1999 10-K:

"…Our poor financial performance took its toll as the stock price fell from $66.75 in May to $50.75 in early October. Later that month, an event beyond our control helped push the price even lower. The editors of the Wall Street Journal removed Goodyear, and three other fine companies, from the "Dow Jones Industrials" list. We were replaced with high-tech and telecommunications companies. [like Home Depot(?)]

"Mutual funds that owned millions of Goodyear shares were forced to sell our stock simply because we were no longer on the Dow 30 and related lists. This, I believe, created a supply/demand imbalance, putting downward pressure on our share price."

The problem is, his opinions are not substantiated by facts.

Hypothetically, the other three stocks would have suffered about the same jolt at GT from being dropped. But an analysis of the stock prices of GT, S, CHV and UK shows that GT stands alone in this respect, indicating that the Dow-drop effect was insignificant and that others factors are almost totally responsible for GT's awful performance.

The relevant moments in time as follows:

1. High price during 1999 prior to announcement of delisting from DJIA (26 Oct 99)
2. 25 Oct 99: Closing price prior to day of announcement
3. 9 Nov 99: 5th trading day after actual drop and 9th day after announcement (the end of what I call the "shock" period of being dropped from the Dow)
4. 31 Dec 99: Presumably the end of the institutional sell-off for Dow-only portfolios
5. 17 Mar 99: Today

I researched the stock price of each dropped company for each relevant date and computed the performance of these stocks during each period.

Period 1: Pre-announcement performance (note that I only use closing prices)

Pre-drop high 25 Oct 99 Performance
GT: 64.64 ( 7 May 99) 44.21 -31.6%
CHV: 100.68 (29 Apr 99) 88.63 -12.0%
S: 51.44 (11 May 99) 28.62 -44.4%
UK: 64.66 (17 Aug 99) 59.02 -8.7%
Average performance of other three: -21.7%
Comments: As you know, none of these performed well during the summer and fall. Sears suffered the biggest drop prior to the announcement (but as we will see, the bleeding generally stopped for Sears by late October). GT significantly underperformed the average of the other three.

As an aside, I find Mr. Gibara's choice of "$50.75 in early October" disingenuous, given that the price fell all the way to $44 prior to the announcement.

Period 2: Shock period (the nine days after the announcement, including the first five days after the actual drop)
     25 Oct 99   9 Nov 99  Performance
GT: 44.21 35.89 -18.8%
CHV: 88.63 84.19 -5.0%
S: 28.62 28.93 +1.1%
UK: 59.02 60.01 +1.7%
Average performance of other three: -0.7%
Comments: This surprised me. I created the "shock period" because I expected a significant drop for all four, due to emotional factors if nothing else. But GT was the only mangy dog, and by a large margin. S and UK actually rose during this time.

Period 3: Post-shock period to end of 1999 (during the sell-off by Dow-only portfolios and individual mechanical investors)
     9 Nov 99  31 Dec 99  Performance
GT: 35.89 27.68 -22.9%
CHV: 84.19 85.90 +2.0%
S: 28.93 30.11 +4.1%
UK: 60.01 66.46 +10.7%
Average performance of other three: +5.6%
Comments: Again, I would have expected a small drop in all four, but during the rest of 1999, each of the other three dropped companies exhibited gains. Conceivably, a negative Dow-drop effect was present but was offset by the market-wide rise in values in Nov and Dec. Even if this is true, GT most definitely did not take part in this rise.

Notably, S and UK rose during the shock period and the post-shock period.

Period 4: Year 2000 Performance (during which time the Dow-drop effect should have disappeared and the company performs on its own merits)
      31 Dec 99   17 Mar 00   Performance
GT: 27.68 23.44 -15.3%
CHV: 85.90 83.31 -3.0%
S: 30.11 30.88 +2.5%
UK: 66.46 50.69 -23.7%
Average performance of other three: -8.1%
Comments: UK has tanked during 2000, but GT (again) trails the average of the other three by a wide margin.

In sum: During the four periods in question, GT was twice the worst performer of the four stocks and never better than third. GT also never outperformed the average of the other three, regardless of Dow status; in fact, GT's best performance was 7.8% worse than the average of the others. Although every company took a one-day hit when the announcement was made, only GT suffered continuous, substantial stock depreciation.

True, Mr. Gibara does mention "poor financial performance" as a reason for the stock dive, but he uses much more ink to discuss the Dow. I believe this is a tactic designed to divert our attention from real issues related to the company itself.

In my opinion, the Dow-drop effect was somewhere between non-existent and minimal. One other company experienced a slight loss during the immediate post-announcement period and through the remainder of 1999, and two companies appreciated in value. The Dow-drop effect is insignificant in terms of assessing the performance of these companies during the past year.
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