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B400 Outgrows S&P 500 in 4Q Results, but Not As Strongly

John A. PrestboJohn A. Prestbo

Companies in the Barron’s 400 Index once again out-grew those in the S&P 500, this time for the fourth quarter of 2016. But the “victory” margins in per-share earnings and revenue growth continued to narrow.

Over 90% of the Barron’s 400 companies—selected for their sound financial conditions—have reported. The results are summarized in the table below.

Median Reported EPS Vs. Median Reported Revenue Vs.
Estimate 4Q 2015 Estimate 4Q 2015
Barron’s 400 1.32% 6.56% 1.50% 7.66%
S&P 500 0.68% 6.27% 0.21% 4.48%

That the year-over-year per-share earnings growth came within 30 basis points for the two indexes stands in sharp contrast to earlier last year when the spread ran about 200 to 400 bps in favor of the Barron’s 400. The 300+ bps superiority in revenue growth for the Barron’s 400 pales somewhat when considered another way: The S&P 500 companies converted their additional sales into larger per-share earnings gains, while the Barron’s 400 companies did the opposite.

The two indexes’ relative strengths and weakness show up more clearly at the sector level, where per-share earnings growth and revenue growth are shown in separate tables.

Barron’s 400 S&P 500
Median Reported EPS Vs. Median Reported EPS Vs.
Estimate 4Q 2015 Estimate 4Q 2015
Consumer Discretionary 2.01% 11.05% 0.85% 10.29%
Consumer Staples -4.10% 0.00% -0.40% 7.06%
Energy -7.83% 3.97% -9.26% -56.61%
Financials 2.48% 13.04% 6.19% 12.31%
Health Care 0.70% 0.00% 0.04% 3.08%
Industrials 0.34% 0.71% 0.27% 2.38%
Materials 3.42% 6.45% -7.60% -10.09%
Technology 1.26% 7.05% 1.63% 6.41%
Telecommunications 28.67% -43.89% -4.21% -90.00%
Utilities 34.90% 39.94% -1.35% 4.29%

Year-to-year per-share earnings growth was strongest for Barron’s 400 companies in consumer discretionary, financials, materials and technology. However, except for the materials sector, the margin of superiority averaged only 71 bps. S&P 500 companies did better in consumer staples, health care and industrials, with an average superiority margin of 393 bps. (As usual, we dismiss telecommunications and utilities, which aren’t significant parts of the Barron’s 400.)

Barron’s 400 S&P 500
Median Reported Revenue Vs. Median Reported Revenue Vs.
Estimate 4Q 2015 Estimate 4Q 2015
Consumer Discretionary 0.38% 7.25% -0.24% 4.16%
Consumer Staples 0.26% 2.56% -0.43% 1.21%
Energy 3.13% 7.31% -1.24% 9.64%
Financials 6.31% 12.20% 3.14% 3.78%
Health Care 1.20% 7.65% 0.17% 5.42%
Industrials 0.91% 5.41% 0.13% 2.62%
Materials 2.63% 4.59% -0.74% 0.64%
Technology 1.62% 12.00% 0.82% 7.08%
Telecommunications -1.14% -0.84% -0.82% -1.02%
Utilities 4.60% 0.13% -12.52% 5.63%

Top-line revenue growth, on a year-over-year basis, was strongly in favor of Barron’s 400 companies. The S&P 500 prevailed only in the energy and utilities sectors, and was especially weak in the important financials and technology sectors. Both indexes converted year-over-year revenue growth to even greater growth in per-share earnings in three sectors each. (They were consumer discretionary, consumer staples and financials for the S&P 500, and consumer discretionary, financials and materials for the Barron’s 400.) However, the S&P 500 enlarged its earnings growth in its three sectors by an average of 684 bps, compared to 349 bps for the Barron’s 400 in its three.

Where that enlargement capability came from is revealed in the table below.

Median Reported EPS Vs. Median Reported Revenue Vs.
Mega Cap (>$10 billion) Estimate 4Q 2015 Estimate 4Q 2015
 Barron’s 400 2.13% 7.32% 1.00% 6.39%
S&P 500 1.13% 7.32% 0.43% 4.92%
Large Cap ($3 bln-$10 bln)
Barron’s 400 1.20% 11.88% 1.82% 9.13%
S&P 500 -5.82% -7.24% -0.53% 3.01%
Mid Cap ($1 bln-$3 bln)
Barron’s 400 0.35% 3.72% 2.22% 10.91%
S&P 500* N/A N/A N/A N/A
Small Cap ($500m-$1 bln)
Barron’s 400 2.53% -6.73% -0.05% 6.20%
S&P 500** N/A N/A N/A N/A
Micro Cap (< $500 mln)
Barron’s 400 -4.00% -22.22% 0.31% 3.80%
S&P 500 N/A N/A N/A N/A

The surprise here is the tie in per-share earnings growth in the mega cap segment, which is the largest for the S&P 500. Mega cap S&P 500 companies managed to achieve that with a 23% smaller year-over-year revenue gain. Thus, mega caps—of which the S&P 500 has 408 versus 81 for the equally weighted Barron’s 400—were the efficient engines in converting revenue growth to larger earnings growth. A second surprise is the decline in year-over-year per-share earnings for the S&P 500’s large cap segment. In this case the “enlargement effect” was a “reduction effect” instead.

For the Barron’s 400, the largest year-over-year gain in per-share earnings came from its large cap segment, while revenue grew the most in its mid-cap segment. Earlier in 2016, the mid caps were strongest in both earnings and revenue growth. Also, small caps and microcaps slipped into negative profit growth because of sabotage by increased costs.

Fourth quarters often are used to write off failed endeavors and make other adjustments. So, the financial results from these periods may not offer a clear view of trends at companies, in industries or the economy at large. That may be the case with the results compared here.

Looking ahead, the Barron’s 400 gets a fresh roster of components after the close this Friday, March 17. As always, they will be financially strong and growth-oriented companies whose shares will be in the Barron’s 400 Index until the third Friday of September.

John Prestbo, senior advisor to MarketGrader Capital, was formerly editor and executive director of Dow Jones Indexes. He was also chairman of the Dow Jones Index Oversight Committee. During his time at Dow Jones Indexes he worked, along with Barron's and MarketGrader, on the development of the Barron's 400 Index. Prior to that, Mr. Prestbo worked as an editor and writer for The Wall Street Journal in various capacities, including page-one editor, commodity news editor and markets editor. Mr. Prestbo has co-authored or edited several books over the past 30 years. The most recent was "The Market's Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average," published by Dow Jones Indexes in 1999 and "Barron's Guide to Making Investment Decisions" which he helped to compile and edit in 2006. Mr. Prestbo won the University of Missouri Award for Distinguished Business Writing in 1967 and the George M. Loeb Achievement Award for Business Writing in 1968. In 2007, he won the William F. Sharpe Indexing Lifetime Achievement Award. That same year, he was honored for his leadership by Dow Jones Indexes during its celebration of 10 years as a separate business unit.

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