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B400 Trounces S&P 500 in 3Q EPS and Revenue Growth

John A. PrestboJohn A. Prestbo

Corporate profits rebounded in the third quarter, and those of companies in the Barron’s 400 Index jumped highest of all.

Market gurus became excited when third-quarter postings began coming in above year-earlier results, following year-over-year declines previously in 2016. Investor expectations suddenly shifted from “oh, well” to “yippee!”, undergirding the market’s post-election surge to record levels. Growth was yanked out of the shadows into the limelight. Old standby growth stocks attracted their share of new capital, of course, but many of them already were expensive. The search for less costly securities brought investors to the Barron’s 400, a selection of financially strong companies where growth has a reasonable price.

As a result, the Barron’s 400 has outpaced the market’s upward push by more than a few percentage points. Moreover, investors discovered these companies not only were continuing their many-quarter trend of besting year-before results but also were doing so at an accelerated pace. This performance, of more than 90% of companies in both indexes, is evident in the following table:

   Median Reported EPS Vs.   Median Reported Revenue Vs.
     Estimate         3Q 2015   Estimate 3Q 2015
Barron’s 400 3.96% 12.40% 0.75% 8.05%
S&P 500 3.33% 9.26% 0.21% 3.32%

Both indexes did better than security analysts had forecast, but the Barron’s 400 companies were 63 basis points higher in per-share earnings growth than those in the S&P 500 and 54 basis points ahead in revenue growth. More important, those margins in year-over-year comparisons ballooned to 314 bps in earnings per share and 473 bps in revenue. However, the S&P 500 companies did a better job of converting increased revenue into more profit–594 bps to 435 bps for the Barron’s 400. That’s probably because the S&P 500 companies overall are substantially bigger than those in the Barron’s 400, which has a decidedly mid-cap complexion.

At the sector level, the comparisons are more diverse, as usual. The table below compares per-share earnings for both indexes:

Barron’s 400 Median Reported EPS Vs. S&P 500 Median Reported EPS Vs.
Estimate 3Q 2015 Estimate 3Q 2015
Consumer Discretionary 2.35% 11.83% 2.37% 10.00%
Consumer Staples 3.72% 9.09% 4.59% 8.33%
Energy -5.70% -10.00% 4.79% -56.35%
Financials 3.93% 12.39% 4.67% 8.81%
Health Care 4.39% 16.01% 2.18% 9.92%
Industrials 3.57% 10.79% 1.30% 3.81%
Materials 0.98% 9.46% 2.69% 10.71%
Technology 8.86% 15.48% 6.66% 13.43%
Telecommunications -3.18% 12.50% 0.42% -11.44%
Utilities -20.80% -29.72% 8.10% 10.33%

S&P 500 companies exceeded analysts’ expectations in seven of the ten sectors. The three in which Barron’s 400 companies prevailed were health care, industrials and technology. But in the year-over-year comparisons the Barron’s 400 out-grew in eight sectors. The S&P 500 did better only in telecommunications and utilities, which are small, relatively unimportant sectors in the Barron’s 400.

Not-as-diverse results were evident in the revenue comparisons, as shown in the following table:

Barron’s 400  Median Reported Revenue Vs. S&P 500 Median Reported Revenue Vs.
Estimate 3Q 2015 Estimate 3Q 2015
Consumer Discretionary 0.36% 7.11% 0.22% 3.99%
Consumer Staples -1.60% 3.64% -0.46% 1.03%
Energy -2.39% 9.96% -1.52% -10.54%
Financials 6.64% 15.66% 2.26% 5.76%
Health Care 0.36% 11.42% 0.15% 6.97%
Industrials -0.14% 5.62% -0.16% 1.29%
Materials 0.08% 1.56% -0.70% -0.57%
Technology 0.84% 7.28% 1.17% 8.35%
Telecommunications -0.53% 20.27% -0.63% -1.41%
Utilities 4.27% 7.10% -4.24% 2.96%

Here it was the Barron’s 400 that topped analysts’ forecasts in seven sectors. S&P 500 companies did better in consumer staples, energy and technology. However, it was only in technology that the S&P 500 posted better year-over-year revenue gains. Barron’s 400 companies dominated in the other nine sectors and, in fact, grew revenue from the year before in all ten sectors.

Stock size is another insightful way of comparing results, though it applies directly only to the market-capitalization weighted S&P 500; the Barron’s 400 is equally weighted.

Median Reported EPS Vs. Reported Revenue Vs.
Estimate 3Q 2015 Estimate 3Q 2015
Mega Cap (>$10 billion)
Barron’s 400 4.38% 13.46% 0.61% 6.85%
S&P 500 2.51% -3.09% 0.64% -5.69%
Large Cap ($3 bln-$10 bln)
Barron’s 400 3.43% 10.79% 0.60% 7.07%
S&P 500 2.90% 5.21% -0.34% 1.62%
Mid Cap ($1 bln-$3 bln)
Barron’s 400 3.85% 13.13% 0.83% 10.82%
S&P 500 NA NA NA NA
Small Cap ($500m-$1 bln)
Barron’s 400 6.43% 11.54% 0.49% 8.90%
S&P 500 NA NA NA NA
Micro Cap (< $500 mln)
Barron’s 400 -0.88% 23.26% 2.40% 8.74%
S&P 500 NA NA NA NA

In mega and large-cap stocks–the only two size segments in the S&P 500–the Barron’s 400 companies trounced those in the larger index in year-over-year growth of both per-share earnings and revenue. Indeed, the S&P 500’s mega-caps, which constitute its larger size segment, posted median declines from year-before results. Only in comparing mega-cap revenue results with analysts’ predictions did the S&P 500 companies barely outdo those in the Barron’s 400.

Meanwhile, the plump year-over-year gains in mid-, small- and micro-caps–segments in which the S&P 500 has no components–helped boost the Barron’s 400’s overall third quarter performance. Though it was the S&P 500 that awakened many investors to the reality that growth is back in favor, it is the Barron’s 400 that has been proving that point quarter after quarter, and continues to do so.

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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