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Grades Are Important, But Other B400 Rules Also Affect Selection

John A. PrestboJohn A. Prestbo

When the Barron’s 400 Index is reconstituted—as it will be after the close of trading today—the stocks of companies whose financial-strength grades have slipped will be deleted. But several companies with “passing” grades aren’t being selected, either. How does that happen?

To be specific, among the 171 deletions are 26 with grades in the 60s and two with grades in the 70s. We asked Carlos Diez, president of MarketGrader, why they weren’t selected, and it turns out that several factors were at play.

Here is the dispersion of grades among the additions and deletions taking effect with Monday’s trading:

Grades Deletions Additions
30s 7
40s 20
50s 116
60s 26 141
70s 2 33
80s 4
Total 171 178

Grades remain the single most important consideration for selection into the Barron’s 400. But sometimes other rules, designed to keep the index liquid or from being dominated by tiny companies, can bar the door.

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.

Comments 2
  • JAMES WINKLE
    Posted on

    JAMES WINKLE JAMES WINKLE

    Author

    I AM INTERESTED IN THE MARKET GRADER CONCEPT
    I OWN BARRONS 400
    MY QUESTION, PLUG IN YOUR FUNDAMENTAL MEASURES AND COME UP WITH A SCORE YOU USE
    THE MEASURES FOR FINANCIAL, RETAIL, PHARMACEUTICAL EACH CATEGORY HAVE DIFFERENT GRADING SYSTEM? COULD THIS BE A
    SHADOW INDEX FUND JIM WINKLE, BROKER


  • Carlos Diez
    Posted on

    Carlos Diez Carlos Diez

    Author

    Some of the MarketGrader indicators do vary by industry, all within the context of our Growth, Value, Profitability and Cash Flow analyses. The bigger differences can be found in the indicators of banks and other financial companies, where certain gauges of financial health require a different measuring stick.

    In the case of banks, for example, we developed specific indicators such as Capital Ratio, Net Interest Margin, Return on Assets, Solvency Ratio, Tangible Common Equity Ratio, Interest Ratio and Loss Reserve Ratio. Also, Return on Equity, which is universal across all companies covered, is measured using a different scale for a bank than, say, a technology company.

    REITs and Utilities also have a few indicators that are specific to them, where we seek to measure their effectiveness, to a certain degree, as income generating securities.

    Regardless of the indicators used, all 24 of them are ultimately summed into a final overall grade between zero and 100. This is what ultimately determines the companies selected to B400, provided all other index rules (such as liquidity and minimum market cap) are met.

    Regarding your question about a “shadow index fund,” could you please clarify what you mean by this? Thank you.

    Carlos Diez
    MarketGrader