What Now for the Dow

After representing the U.S. stock market for more than a century, the Dow Jones industrial average isn't going away. Perhaps it should. Despite the occasional injection of new blood (Cisco Systems and Travelers replaced General Motors and Citigroup, respectively, this year), the 30 Dow stocks still contain too many remnants from a bygone industrialized economy. In addition, its members are usually past their prime growth years (although they make up for it in size and financial strength). Worse, from a practical viewpoint, the 30-stock index uses an anachronistic, price-weighting scheme rather than weighting results by a firm's market value, as most modern indexes do (for more on the Dow's shortcomings, see Why the Dow Is a Dumb Index).

Still, its member companies are influential and widely held. Below is our take on each of them, including our traffic-signal-style ratings: green for buy, yellow for hold and red for sell. (Prices are as of August 7.)

3M (MMM), $74.10 at the close September 24

The time to buy 3M was back in March, when the stock traded for a ridiculous $41 -- ridiculous because 3M is one of the most dependable U.S. manufacturing businesses ever, and buying it for ten times estimated 2009 earnings was a slam-dunk. Although 3M reported a 16% decline in second-quarter earnings, it raised its forecast for 2009. Now the stock is merely a good long-term buy.

ALCOA (AA), $13.51
Shares of the aluminum producer are just where you want them to be when buying into a highly cyclical business -- off 71% from their peak and close to rock bottom. But patience is required. Gains will come as the economy recovers. Analysts expect a $1.01-a-share loss this year before black ink arrives in 2010.

AT&t (T), $27.03
Thanks in part to its exclusive iPhone deal, AT&T's wireless business is doing well, even as the wired-phone business continues its inevitable decline. Although we worry about cutthroat competition and the threat of tougher government regulation, the $1.64 dividend looks safe and very attractive. The stock yields 6.3%.

AMERICAN EXPRESS (AXP), $33.85 The credit-card issuer is in relatively good financial shape compared with other financial firms. But job losses, chastened consumers and new federal regulations all pose big obstacles to growth. In addition, the shares have tripled in value since March, leaving them well beyond bargain territory.

BANK OF AMERICA (BAC), $16.98
Yes, BofA posted a second-quarter profit of $3.2 billion, helped by one-time gains from asset sales and government guarantees that allow it to borrow cheaply. But not enough has been done to purge its balance sheet of the problem loans, which are an ongoing threat to profits. Until they're gone, avoid the shares.

BOEING (BA), $51.79
Whoever named Boeing's next big plane the Dreamliner either had a great sense of irony or had no clue. The 787 has been plagued by delays, cancellations and cost overruns. Still, the company has a backlog of orders for 850 planes. Boeing's defense business -- half of revenues -- remains strong, and second-quarter earnings were up 22% from a year earlier.

CATERPILLAR (CAT), $51.85
The heavy-equipment maker needs a strong global economic recovery to be back on top. For now, Caterpillar is battening down the hatches -- laying off workers and streamlining operations -- to keep its strong cash flow from flagging. This year it posted its first quarterly loss since 1992. Caterpillar is a first-class company that will roar back -- eventually.

CHEVRON (CVX), $70.71
The California-based oil company offers financial strength, a generous, $2.72 dividend (resulting in a 3.9% yield at the current price) and a number of promising oil-and-gas exploration projects around the globe that have recently come on line, or soon will. Chevron shares are more closely tied to oil-price movements than those of ExxonMobil, but they're also cheaper.