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B400 Outgrows S&P 500 in 3Q, but Victory Margins Are Under Pressure

John A. PrestboJohn A. Prestbo

Winter’s chill is settling in on more than the landscape. While the financially solid companies in the Barron’s 400 Index easily outgrew earnings and revenue of the S&P 500 components, the margin of victory continued to shrink in the third quarter. Moreover, the gains themselves receded a bit from the blow-the-roof-off increases posted earlier this year.

Both indexes posted positive surprises in earnings and revenue, but the Barron’s 400 didn’t outshine the S&P 500 in this respect as it often has in the past. Rather, the median increases were much more similar. In year-over-year gains, the Barron’s 400 pulled well ahead of the S&P 500.

Median 3Q 2018 Actual vs.
Median EPS Median Revenue
Estimate 3Q 2017 Estimate 3Q 2017
Barron’s 400 4.39% 30.11% 0.59% 10.37%
S&P 500 4.18% 21.42% 0.37% 5.49%

We usually check on how security analysts’ expectations changed over the previous six months. It’s noteworthy not only that earnings forecasts were raised (more for the Barron’s 400 than the S&P 500) but also that revenue predictions were lowered—significantly more so for the Barron’s 400. The waning vigor of the global economy undoubtedly was a major cause.

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 7.25% -6.28%
S&P 500 2.26% -2.47%

At the sector level, median earnings increases appear solid for both indexes. Closer inspection reveals that while the Barron’s 400 prevailed in most sectors, S&P 500 companies posted bigger year-over-year per-share earnings advances in three out of 10—energy, health care and utilities.

Barron’s 400 S&P 500
Median Reported EPS Vs. Median Reported EPS Vs.
Estimate 3Q 2017 Estimate 3Q 2017
Consumer Discretionary 5.83% 27.48% 4.50% 19.23%
Consumer Staples 1.73% 17.39% 2.67% 10.84%
Energy 5.41% 42.09% 14.75% 135.51%
Financials 3.45% 33.98% 4.36% 26.92%
Health Care 9.06% 16.85% 3.99% 17.89%
Industrials 3.94% 37.92% 2.93% 24.85%
Materials 2.82% 34.88% 3.13% 25.34%
Technology 6.18% 27.56% 5.96% 22.98%
Telecommunications N.A. N.A. 1.57% 21.62%
Utilities 1.48% 10.58% 4.53% 11.11%

Energy can be explained by the S&P 500 sector having severely depressed year-earlier earnings, thus making the recovery this year appear more spectacular. (That recovery reversed itself in the fourth quarter as oil prices sank again.) As for utilities, the S&P 500 has a more industry-representative component selection than the Barron’s 400, which has just five components. The explanation for health care seems to be that the S&P 500, with its larger component set, had more individual stunning performers than the Barron’s 400, which restricts itself to those companies with superior financial strength.

In revenue, the Barron’s 400 sectors prevailed in every year-over-year comparison, although in two sectors by only 61 basis points (financials) and 37 basis points (health care). The S&P 500 out-surprised analysts in consumer staples, financials and health care.

Barron’s 400 S&P 500
Median Reported Revenue Vs. Median Reported Revenue Vs.
Estimate 3Q 2017 Estimate 3Q 2017
Consumer Discretionary 1.22% 9.83% 0.09% 5.54%
Consumer Staples -0.44% 7.20% 0.53% 2.32%
Energy 2.66% 51.73% 1.31% 30.92%
Financials -0.02% 2.05% 0.46% 1.44%
Health Care 0.32% 7.62% 0.43% 7.25%
Industrials 0.56% 11.71% 0.05% 7.85%
Materials 0.86% 34.88% 0.40% 7.03%
Technology 1.21% 12.67% 0.80% 7.68%
Telecommunications N/A N/A 0.32% 15.30%
Utilities 1.17% 6.96% 0.15% 2.39%

Because revenue is much easier to predict than earnings, it is troubling that the Barron’s 400 underperformed expectations in two sectors, consumer staples and financials. They weren’t big disappointments, but they were the first for the Barron’s 400 in a long time.

We also look at earnings and revenue growth by size of company. Though the Barron’s 400 is equally weighted, so the smallest company has as much influence on index performance as the largest, this data often illuminates aspects of the growth story that aren’t visible otherwise. For instances, all size segments of the Barron’s 400 have double-digit year-over-year per-share earnings gains, and no increase less than 20%. Similarly, revenue growth over a year earlier was double-digit in all but one segment, small capitalization companies.

Median Reported EPS Vs. Median Reported Revenue Vs.
Mega Cap (>$10 billion) Estimate 3Q 2017 Estimate 3Q 2017
Barron’s 400 4.48% 31.49% 0.72% 10.37%
S&P 500 4.24% 21.95% 0.43% 6.11%
Large Cap ($3 bln-$10 bln)
Barron’s 400 3.73% 28.27% 0.96% 10.43%
S&P 500 3.96% 17.20% 0.00% 2.89%
Mid Cap ($1 bln-$3 bln)
Barron’s 400 5.31% 29.27% 0.59% 10.31%
S&P 500 N/A N/A N/A N/A
Small Cap ($500m-$1 bln)
Barron’s 400 4.08% 29.83% 0.12% 7.21%
S&P 500 N/A N/A N/A N/A
Micro Cap (< $500 mln)
Barron’s 400 5.00% 20.93% -1.05% 14.27%
S&P 500 N/A N/A N/A N/A

The Barron’s 400 and S&P 500 share just two size segments, mega-cap and large-cap. The Barron’s 400 outgrew both per-share earnings and revenue from the year before in the two segments by roughly 10 percentage points—although the S&P 500 gains were, in themselves, impressive. The only negative in the entire size analysis comes from Barron’s 400 micro-caps underperforming analysts’ revenue forecasts. However, that segment posted the second-largest one-year earnings increase in the index, which is good news because micro-caps have lagged this year.

All this growth has no sway currently in the stock market, which is being buffeted by political cross-currents. Investors are exiting in droves with little discernment about companies that are doing well. The financially strong Barron’s 400 companies will continue to grow, and one day investors will notice them again.

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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