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.
- A change was made in the underlying universe of stocks from which the selects are made. This had the effect of eliminating some companies that do most of their business in the United States but are incorporated in other countries, such as Hong Kong and Ireland. Accenture PLC is an example.
- Some companies with good grades had stocks with less than the minimum liquidity. The Barron’s 400 requires an average daily trading of $2 million over the three months preceding the biannual selections. Oritani Financial Corp. is an example.
- Others were passed over because their market capitalizations fell below the minimum $250 million. Homestreet Inc. is an example.
- Finally, several were not picked because the sector they are in—in this case, consumer discretionary—had already reached the 20% weight limit that no sector can exceed. Dicks Sporting Goods is an example.
Here is the dispersion of grades among the additions and deletions taking effect with Monday’s trading:
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.