DOW'S NEW STARS; KEY MARKET INDEX CHOOSES BEAUTY OVER AGE.

Byline: Miriam Hill Knight Ridder Newspapers

The young and the glamorous shoved aside the old and the dusty in the Dow Jones industrial average Tuesday.

Dow Jones & Co. announced plans to add Microsoft Corp., the most valuable company in the world, as well as Intel Corp., Home Depot Inc. and SBC Communications Inc. to the world's most famous stock-market measure. On Monday, they will replace Chevron Corp., Goodyear Tire & Rubber Co., Sears Roebuck & Co. and Union Carbide Corp.

Dow-watchers (aren't we all these days?) said the updated average would more accurately reflect the economy's dramatic shift from manufacturing to high-tech. After all, Microsoft chief Bill Gates is a household name, but - quick - name Goodyear's chief executive. (Ten points if you said Sachs Gillmor.)

``The Dow people are trying to walk that fine line between the old economy and the new economy,'' said Charles Carson, who manages the Strong Dow 30 Value Fund, which invests in Dow component stocks. ``The companies that are coming into the Dow are really much more growth-oriented than those being removed.''

That may make the Dow swing more wildly over the short run, he added.

Carson and others said they liked the Dow's new look, but they questioned why it took so long.

Tuesday's substitutions, the first in two years, are noteworthy because they include two companies - Microsoft and Intel - that are listed on the Nasdaq, the first time that the Dow's all-New York Stock Exchange lineup has been broken. Nasdaq is dominated by such newfangled tech stocks.

``I'd say it's symbolic but a little bit late,'' said Theodore Aronson, a money manager in Philadelphia. ``It's like saying it's a good thing they dropped the buggy-whip manufacturers; autos have taken over big-time.''

His firm, Aronson + Partners, estimated that if Dow Jones had replaced Union Carbide with Microsoft in 1990, the Dow would now be at more than 20,000 instead of the 10,302.13 it closed at Tuesday.

But Gus Tauter, who runs Vanguard Group's index funds, cautioned against assuming that high-flying stocks would pump up the Dow's returns.

``They certainly have been supercharged over the last decade,'' Tauter said, ``but I think it would be presumptuous to say that they're going to propel the Dow into the stratosphere in the future.''

For all its fame, the Dow is hardly a perfect market measure. It consists of just 30 large-cap stocks, compared with the 500 in the Standard & Poor's 500 index or the more than 8,000 in the entire stock market.

The editors of the Wall Street Journal, a Dow Jones publication, decide which stocks to remove from and add to the average, but they don't have specific criteria for excluding or including a stock. Two people, John Presto, the Journal's markets editor, and Paul E. Steiner, the paper's managing editor, get the final say.

Quirky measure

The Dow is also a quirky market measure. In the days before calculators, Charles Dow, the creator of the average, ran the numbers by hand. He simply added up the prices of the stocks in the average and divided by the total number of stocks. The calculation is pretty much the same today. As a result, a change in a high-priced stock will cause a larger change in the overall average than the same change in a lower-priced stock, even though the company's entire market value should be a more relevant factor than the share price.

``It's kind of an anachronism,'' Aronson said.

The last time the Journal editors made changes to the Dow was 1997. They added Hewlett-Packard Co., Johnson & Johnson, Wal-Mart Stores Inc. and Travelers Group Inc., now Citigroup Inc. Those stocks replaced Texaco Inc., Bethlehem Steel Corp., Woolworth Corp., and Westinghouse Electric Corp.

The changes then and Tuesday occurred because new corporate leaders had arisen.

``The changes we are announcing today will make the Dow Jones industrial average even more representative of the evolving U.S. economy, as the average - and the nation - enter a new century,'' Steiner said in a news release.

In shirking the companies that built the United States into an industrial power for those that have helped maintain the country's world-market dominance, Dow Jones put investing beauty before age.

Sears Roebuck & Co., founded in 1886, has been around longer than the Dow, which appeared in 1896. But shares in Sears are down 36.47 percent this year, compared with a 15.53 percent increase for Home Depot, which entered the world just 21 years ago.

Poor performers

The stocks leaving the Dow had been some of the poorest performers in the average. They earned just 4 percent annually on average over the last three years, according to Morningstar Inc., a research firm in Chicago. The four new stocks have returned an average of nearly 50 percent annually over the same period.

``The ones being added have been stars,'' said Jeremy Siegel, a professor at the Wharton School and author of ``Stocks for the Long Run.'' ``The ones that are leaving are not.''

But they were once, a sign of how quickly technological leadership can fade. Goodyear scientists, who figured out how to make sap from rubber trees into products that could be used daily, were the whiz kids of their era, just as Microsoft's programmers are today. It would probably be a stretch to call Akron the Seattle of its day, but Goodyear did turn that Ohio city into an industrial center.

Many companies have entered and left the Dow over the years. General Electric is the only company of the original dozen still in the Dow. Most people would not recognize the other original Dow members, which included National Lead, Tennessee Coal, Iron & Railroad Co., and U.S. Leather. The early Dow companies have since merged, gone out of business or changed names.

Changes in the Dow often symbolized larger themes or eras in the American economy. Tennessee Coal, for example, left the Dow in 1907 after it was acquired by U.S. Steel, run by tycoon J.P. Morgan. The deal was part of an unusual tit-for-tat, according to Dow Jones. Morgan had agreed to rescue the economy during the panic of 1907. In return, President Theodore Roosevelt agreed not to object to the acquisition.

Standard Rope & Twine Co., American Smelting & Refining, and Studebaker Corp. have all joined and left the Dow over the decades. In fact, inclusion in the Dow is not always a bullish sign, Aronson said.

``IBM, after it was added to the index in 1979, underperformed for the better part of 20 years,'' he said.

Who's in

(With ticker symbol, company description and market capitalization)

Microsoft (MSFT)

World's largest software company

$474.9 billion

Intel Corp. (INTL)

World's largest semiconductor manufacturer

$236.3 billion

Home Depot (HD)

Retailer of home renovation material

$104.8 billion

SBC Communications (SBC)

Largest Baby Bell; divisions include Pac Bell

$155.6 billion

Who's out

(With ticker symbol, company description and market capitalization)

Chevron Corp. (CHV)

San Francisco-based oil company

$57.7 billion

Sears Roebuck (S)

Nation's second largest retailer

$10.2 billion

Goodyear Tire & Rubber Co. (GT)

World's largest tire maker

$6.4 billion

Union Carbide Corp. (UK)

Merging with Dow Chemical Co.

$7.9 billion

CAPTION(S):

4 boxes, photo

Photo: no caption (traders on market floor)

David Karp/Associated Press

Box: (1) Who's in (see text)

(2) Who's out (see text)

(3) Evolution of the index

(4) Components of Dow Jones