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B400 Outgains S&P 500 in 4Q Earnings and Revenue

John A. PrestboJohn A. Prestbo

Though the strong economy lifted nearly all boats in the fourth quarter of 2017, the financially fit, growth-oriented companies of the Barron’s 400 Index led the regatta of corporate reports with flags flying.

It wasn’t even close, as this “boxscore” shows:

Median Reported EPS Vs. Median Reported Revenue Vs.
Estimate 4Q 2016 Estimate 4Q 2016
Barron’s 400 6.12% 25.00% 2.70% 16.96%
S&P 500 4.03% 14.14% 1.80% 8.23%

The stunning year-over-year gains in the Barron’s 400—25% for per-share earnings and 17% for revenue—were respectively 77% and 106% higher than the results posted by companies in the S&P 500 Index. These advances breathed new life into the stock-market rally (temporarily, as it turned out) and set the stage for what investors believed would be equally impressive reports in 2018.

Surprisingly, securities analysts’ estimates didn’t change all that much in the months leading up to the posting of fourth-quarter results. That indicates these analysts were tuned in to the worldwide economic acceleration. They trimmed their earnings forecasts by very little and raised their revenue predictions by nearly the same for both sets of companies.

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -1.20% 3.84%
S&P 500 -1.57% 3.85%

At the sector level, the Barron’s 400 companies blew away their S&P 500 counterparts in almost every comparison that mattered. Only the S&P 500 energy sector prevailed in year-over-year gains in per-share earnings. The S&P 500 utilities sector also led, but utilities are a sparsely populated sector in the Barron’s 400. In revenue, the Barron’s 400’s increases were superlative across the board. Here are the details, first for per-share earnings and second for revenue:

Barron’s 400 S&P 500
Median Reported EPS Vs. Median Reported EPS Vs.
Estimate 4Q 2016 Estimate 4Q 2016
Consumer Discretionary 6.61% 24.83% 0.24% 1.09%
Consumer Staples 8.44% 21.26% 1.79% 10.04%
Energy 3.49% 44.95% 7.66% 110.98%
Financials 5.63% 21.43% 3.94% 11.86%
Health Care 10.78% 28.07% 3.15% 12.70%
Industrials 5.95% 25.88% 2.87% 10.07%
Materials 13.39% 33.33% 6.85% 30.77%
Technology 8.06% 25.71% 5.69% 20.66%
Telecommunications 30.81% 17.78% -2.25% 0.00%
Utilities 5.28% 3.38% 3.53% 16.22%


Barron’s 400 S&P 500
Median Reported Revenue Vs. Median Reported Revenue Vs.
Estimate 4Q 2016 Estimate 4Q 2016
Consumer Discretionary 1.10% 11.06% -19.87% 1.44%
Consumer Staples 1.68% 13.70% 0.64% 3.84%
Energy 3.53% 30.40% 2.30% 23.65%
Financials 9.50% 16.09% 4.23% 7.47%
Health Care 3.11% 25.23% 2.19% 8.66%
Industrials 2.38% 16.89% 1.64% 7.72%
Materials 4.32% 18.84% 4.20% 11.97%
Technology 1.82% 21.57% 1.70% 11.05%
Telecommunications 0.76% 5.37% 1.21% 4.99%
Utilities -3.66% 7.93% -1.06% 4.91%

The one troubling area is in the consumer sectors, discretionary and staples. There, the S&P 500 companies squeezed out only small median year-over-year advances while the medians of Barron’s 400 components were comfortably in the double digits. A telling sign is that revenue of the consumer discretionary sector fell below analysts’ estimates by 20%–far and away the biggest disappointment of the quarter. Fifteen companies are in both indexes, which means the additional 39 companies in the Barron’s 400 sector must have done very well compared to the extra 72 in the S&P 500 sector.

In terms of company sizes, the Barron’s 400 outpaced the S&P 500 in all comparable segments. Moreover, the Barron’s 400 posted robust gains in smaller-sized segments that aren’t in the S&P 500. Here are the details:

Median Reported EPS Vs. Median Reported Revenue Vs.
Mega Cap (>$10 billion) Estimate 4Q 2016 Estimate 4Q 2016
Barron’s 400 4.38% 21.94% 2.09% 13.88%
S&P 500 4.11% 15.17% 1.75% 8.66%
Large Cap ($3 bln-$10 bln)
Barron’s 400 8.46% 29.42% 2.41% 17.78%
S&P 500 2.93% 6.56% 2.32% 5.50%
Mid Cap ($1 bln-$3 bln)
Barron’s 400 6.18% 23.58% 3.56% 20.59%
S&P 500 1.82% 6.20% 2.55% 1.02%
Small Cap ($500m-$1 bln)
Barron’s 400 10.87% 41.17% 3.59% 23.87%
S&P 500 N/A N/A N/A N/A
Micro Cap (< $500 mln)
Barron’s 400 29.23% 61.54% 7.47% 4.51%
S&P 500 N/A N/A N/A N/A

The mostly big year-over-year increases for small- and micro-capitalization companies represent an about-face from results posted in 2017. Then, declines or infinitesimal gains were regularly posted, especially in profits, as these companies took on greater costs (mainly employees) to meet demand while revenue failed to rise commensurately. But in the fourth quarter, the economy finally strengthened enough to cut smaller companies some slack.

As for what lies ahead, there is no perfect crystal ball. One indication may be provided by the median MarketGrader financial strength scores, which are the basis of selection to the Barron’s 400. The fourth quarter increases in per-share earnings and revenue moved the scores higher, while rising stock-market prices were a negative influence because they made the stocks less of a value. (The Barron’s 400 rose 9% from Sept. 29 through Jan. 31 of this year versus 12% for the S&P 500.) Look what happened to the scores as the results rolled in:

Median MarketGrader Score
1 Week Before 4Q
Results Announced
1 Week After 4Q
Results Announced
Barron’s 400 63.51 64.66 1.81%
S&P 500 52.02 50.63 -2.67%

Stellar earnings and revenue gains for the Barron’s 400 pushed scores higher more than rising stock prices pushed scores lower, while the opposite was true for the S&P 500. Higher scores put the Barron’s 400 in position to make the most of whatever lies ahead.

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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