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B400 Companies Outgrow the S&P 500 in 3Q Profit and Sales

John A. PrestboJohn A. Prestbo

A strengthening global economy is doing wonders for the stock market. The market’s post-recessionary rebound is being extended to nearly unprecedented lengths. And this persistent resilience is extra beneficial for the companies in the Barron’s 400 Index, all of which are geared up for growth.

The Barron’s 400 is comprised of a diverse set of company sizes and lines of business. Their common characteristics are that they are all financially strong—as judged by 24 numeric measurements—and they are committed to growth strategies.

Proof of this pudding shows up quarterly as companies report their results for the preceding three months. For the third quarter of 2017, the Barron’s 400 turned in an A-plus performance as compared to the S&P 500, a widely accepted proxy for the overall U.S. stock market. The numbers tell the story:

Median 3Q 2017 Actual vs.
Median EPS vs. Median Revenue vs.
Estimate 3Q 2016 Estimate 3Q 2016
Barron’s 400 5.86% 14.81% 2.00% 11.64%
S&P 500 3.81% 9.33% 1.16% 5.69%

The Barron’s 400 not only beat the S&P 500 in per-share earnings and revenue surprises but also racked up double-digit gains over year-earlier results. Overall, the Barron’s 400 bested the S&P 500 by an average of 3.6 percentage points across these four gauges.

As usual, securities analysts tended to trim their estimates over the past six months. The forecasting haircuts were roughly the same magnitude for both indexes as regards earnings per share. However, the Barron’s 400 revenue estimate actually rose, versus a decline for the S&P 500.

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -2.42% 2.59%
S&P 500 -2.94% -2.99%

On the sector level, the two indexes evenly split on which one topped the other in terms of beating per-share earnings estimates. But in year-over-year earnings comparisons, the Barron’s 400 out-gained the S&P 500 in all but two sectors, telecommunications and utilities, which happen to be the most insignificant in the Barron’s 400 portfolio. There aren’t any utilities at all among current components, and only two telecom companies.

Barron’s 400 S&P 500
Median Reported EPS Vs. Median Reported EPS Vs.
Estimate 3Q 2016 Estimate 3Q 2016
Consumer Discretionary 5.23% 9.06% 2.78% 6.16%
Consumer Staples 10.91% 22.73% 3.05% 5.49%
Energy 6.03% 25.00% 14.13% 69.71%
Financials 4.39% 13.35% 5.35% 12.91%
Health Care 4.08% 18.52% 3.06% 11.56%
Industrials 4.26% 10.23% 2.52% 9.85%
Materials 1.10% 15.57% 3.84% 6.38%
Technology 10.83% 34.81% 6.36% 15.28%
Telecommunications -307.50% -225.35% -0.65% -2.97%
Utilities NA NA 1.46% -5.80%

The Barron’s 400 company with the largest dollars-and-cents per-share earnings surprise was NVR Inc., a homebuilder and mortgage banker in the consumer discretionary sector. It earned $38.02 a share in the quarter, $2.25 more than the consensus estimate—and almost $10 a share more than a year earlier. The company credited a 21% increase in new-home orders, a higher gross profit margin and lower effective tax rate for the stellar performance.

The company with the largest percentage surprise in earnings per share was Exelixis, Inc., a biotechnology firm specializing in cancer drugs. Security analysts were looking for eight cents a share but the health-care company reported 26 cents, thanks primarily to increased sales of its cancer treatments.

On the revenue side, Barron’s 400 companies had bigger surprises than S&P 500 counterparts in most sectors. Moreover, the Barron’s 400 shone brightly in comparing this year’s revenue with that of a year before. In five sectors the Barron’s 400 posted double-digit year-over-year percentage gains. By contrast, the S&P 500 achieved double-digit growth in just one sector, energy.

Barron’s 400 S&P 500
Median Reported Revenue Vs. Median Reported Revenue Vs.
Estimate 3Q 2016 Estimate 3Q 2016
Consumer Discretionary 0.12% 6.73% 0.75% 4.29%
Consumer Staples 1.11% 7.81% 1.00% 3.33%
Energy 2.82% 29.84% 1.96% 17.02%
Financials 7.74% 12.60% 3.69% 7.03%
Health Care 1.29% 11.86% 0.70% 6.11%
Industrials 1.27% 9.05% 0.80% 5.63%
Materials 1.56% 15.01% 1.58% 7.66%
Technology 2.22% 17.95% 1.50% 8.25%
Telecommunications 1.25% -4.74% -0.52% -2.99%
Utilities NA NA -4.83% -1.73%

In terms of stock size, measured by market capitalization, the Barron’s 400 and S&P 500 have just two segments in common—mega cap ($10 billion and up) and large cap ($3 billion to $10 billion). The Barron’s 400 bested the S&P 500 in both segments, in surprises and in year-over-year comparisons.

Median Reported EPS Vs. Median Reported Revenue Vs.
Mega Cap (>$10 billion) Estimate 3Q 2016 Estimate 3Q 2016
 Barron’s 400 5.86% 20.54% 1.81% 10.02%
S&P 500 3.78% 9.84% 1.18% 6.25%
Large Cap ($3 bln-$10 bln)
Barron’s 400 6.48% 13.01% 2.09% 13.12%
S&P 500 5.14% 1.82% 0.78% 2.46%
Mid Cap ($1 bln-$3 bln)
Barron’s 400 5.81% 12.66% 2.40% 12.77%
S&P 500 N/A N/A N/A N/A
Small Cap ($500m-$1 bln)
Barron’s 400 4.09% 11.61% 4.64% 12.58%
S&P 500 N/A N/A N/A N/A
Micro Cap (< $500 mln)
Barron’s 400 -1.05% -21.88% 0.73% 6.24%
S&P 500 N/A N/A N/A N/A

The current market favors growth stocks over value stocks, which certainly redounds to the benefit of the Barron’s 400. But it is the financial strength of the Barron’s 400 companies that enables them to take advantage of particular circumstances in both the economy and the market. That’s why we can expected the Barron’s 400 to continue to shine as we finish this year and roll into 2018.

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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