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The MarketGrader 100 Index Journal

September 2018

Carlos DiezCarlos Diez

August In Review

The MarketGrader 100 Index (MGONE) participated handsomely in the market’s August rally, gaining 4.8% on a price return basis during the month that included its most recent semi-annual reconstitution. This was better than the 3.0% and 3.3% gains posted by the S&P 500 and Russell 3000, respectively. Notably, MGONE also outperformed the small cap benchmark, the Russell 2000 Index, which had a 4.2% price return for the month.

The end of August dovetails nicely with the conclusion of the second quarter’s earnings season, providing us an opportunity to take stock of how MGONE’s constituents did relative to the S&P 500, a common proxy for the overall health of U.S. corporate earnings, and to look ahead to the upcoming third quarter.

Through August 31st, 99 of the index’s 100 constituents had reported earnings for the previous quarter, in line with the 99% of the S&P 500’s members that had also reported results for the period. Overall, MGONE’s earnings season was stellar, with companies beating their consensus estimate by an average of 8.2%. More importantly, MGONE companies reported an average increase of 63.3% in earnings per share relative to the comparable period a year earlier, while their median gain was 36.2%. The S&P 500, on the other hand, reported a 25% increase in earnings per share from 2017’s second quarter, according to FactSet. Whether seen through the lens of MGONE or the S&P 500 Index, one thing is clear: U.S. companies are humming.

A look at how individual sectors did provides color to our analysis. Leading all MGONE sectors, Energy companies reported a whopping average 251% increase in earnings per share as the sector continues to rebound on the back of solid oil price improvements. The gain was smaller when looking at the median, which was ‘only’ 75%. This can be explained by a gaudy 1,183% jump in earnings per share for Energen Corp. (EGN), which reported second quarter earnings per share of $0.77 compared to just $0.06 a year earlier. It’s also worth noting that MGONE holds only seven energy companies. A similar story played out among Materials companies, of which MGONE also owns only seven. They reported an average 137% increase in earning per share last quarter, while the median was 125%. Figure 1. shows MGONE’s average and median earnings per share changes from a year earlier by sector compared to the S&P 500 Index. Keep in mind that of the 11 sectors in the S&P 500, MGONE is currently exposed to only seven (eight if you include Real Estate as a separate sector, although MarketGrader still classifies real estate companies under Financials).

Figure 1. Second Quarter EPS Growth for MGONE and S&P 500 by Sector

MarketGrader 100 Index S&P 500 Index
Sector Weight Average Growth Median Growth Weight Q2 EPS Growth
Consumer Discretionary 12% 28.8% 25.0% 13% 21.1%
Energy 7% 251.4% 74.8% 6% 125.1%
Financials 25% 48.7% 34.4% 14% 21.1%
Health Care 8% 33.3% 29.3% 15% 16.5%
Industrials 25% 42.4% 35.9% 10% 16.7%
Materials 7% 137% 125% 3% 56%
Technology 16% 41.2% 34.2% 26% 32.7%
Sources: MarketGrader Research, FactSet

Looking ahead at the third quarter it’s clear that while analysts’ projections for corporate earnings growth are still robust, they expect overall growth to tail off from the blistering pace of the second quarter. For S&P 500 companies analysts are predicting overall earnings per share gains of 21.1% relative to the comparable quarter in 2017. For MGONE, on the other hand, analysts are expecting average gains of 30.4%. When looking at the sector breakdown, analysts are once again anticipating Energy companies to lead the way for both MGONE and S&P 500 constituents, with an average increase of 89% expected for MGONE’s energy companies and 93% for those in the S&P 500. For the two biggest sectors in MGONE, Financials and Industrials, each with a 25% weight of the total index, yearly growth in earnings is forecast at 35% and 26%, respectively. We’ll report on how the actual numbers turn out once the quarter is in the rearview mirror later this fall.

Figure 2. Expected Third Quarter EPS Growth for MGONE and S&P 500 by Sector

MarketGrader 100 Index S&P 500 Index
Sector Weight Average Est. Growth Median Est. Growth Weight Q3 EPS Growth Est.
Consumer Discretionary 12% 18.5% 19.2% 13% 14%
Energy 7% 88.6% 29.4% 6% 93%
Financials 25% 35.4% 29.5% 14% 37.7%
Health Care 8% -0.1%* 8.0% 15% 9%
Industrials 25% 25.7% 23.2% 10% 15.1%
Materials 7% 55.0% 40.5% 3% 29.6%
Technology 16% 25.5% 21.5% 26% 14.1%
*MGONE’s average third quarter earnings per share growth estimate is skewed downward by a single company, Nektar Therapeutics, a biotechnology stock with very variable earnings per share reports.
Sources: MarketGrader Research, FactSet.

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