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Analysts Predict Major 1Q Growth from B400 Companies

John A. PrestboJohn A. Prestbo

If the security analysts’ forecasts are right, companies in the Barron’s 400 Index will report stepped-up earnings and revenue growth for this year’s fourth quarter. And once again, that growth substantially surpasses the levels expected for publicly traded companies generally.

This is typical quarterly performance for Barron’s 400 companies, which are selected for the index because of their sound financial condition and demonstrated commitment to growth. They aren’t immune to difficulties, but they tend to shake off problems more quickly than most. This quarter, some slices of the Barron’s 400 that had growth challenges throughout 2016 are predicted to rebound nicely.

The median forecasts of per-share earnings and revenue growth for Barron’s 400 companies are roughly 80% greater than those of the S&P 500 companies:

Median 1Q 2017 Estimate vs. Median 1Q 2016 Actual
EPS Revenue
Barron’s 400 8.82% 7.15%
S&P 500 4.90% 3.93%

Mean averages of expected EPS and revenue growth are much higher than medians for both indexes, indicating many companies are predicted to report outsized gains. In all, 66% of the Barron’s 400 components are forecast to announce increased per-share earnings from a year earlier, versus 60% for the S&P 500. In revenue, 81% of the Barron’s 400 companies are projected to post year-over-year increases, versus 68% for the S&P 500.

Analysts often reduce their estimates as the reporting period draws nearer. That was true this time for per-share earnings, but revenue forecasts rose.

Median Estimate Changes Over Past Six Months
EPS Revenue
Barron’s 400 -3.55% 4.75%
S&P 500 -4.35% 0.26%

Here, too, the Barron’s 400 prevails. Its median EPS estimate shrank by almost a full percentage point less than for the S&P 500, while its median revenue forecast shot up tremendously more.

Sector comparisons reveal some predicted performance nuances between the two indexes, but there aren’t any surprises that change the overall picture. One minor difference is that as of the latest semiannual reconstitution of the Barron’s 400 in March, the index has no telecommunications companies.

Median 1Q 2017 Estimate vs. Median 1Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 5.59% 1.36% 5.33% 3.19%
Consumer Staples 2.93% 3.44% 5.47% 2.26%
Energy -0.54% 91.93% 31.45% 44.25%
Financials 9.77% 6.83% 5.52% 2.52%
Health Care 9.72% 5.12% 9.43% 3.91%
Industrials 9.01% 1.58% 6.45% 2.56%
Materials -4.35% -0.63% 3.08% 0.71%
Technology 12.53% 12.10% 11.31% 6.25%
Telecommunications N.A. -4.46% N.A. -1.68%
Utilities 2.18% 2.37% 5.25% 7.61%

In the EPS forecasts, the Barron’s 400 does better than the S&P 500 in all but four sectors: consumer staples, energy, materials and utilities. Energy is interesting because since the crash of crude oil prices in 2014 the Barron’s 400 strictly limited its components in this sector to a few financially robust companies. By contrast, the S&P 500 stuck with its full roster, whose profits were decimated or eliminated. Now that the oil-price tide has turned a little, projected EPS gains look gigantic for the S&P 500 because they are recovering from a very low level. For the Barron’s 400, however, this first quarter’s raw-energy price fluctuations barely moved the needle.

Energy is one of only two sectors (utilities being the other) in which the S&P 500 comes out on top in revenue-growth estimates. The large six-month upward revision of predicted revenue gains did a lot to push the Barron’s 400 ahead of the S&P 500 in most of the sectors.

Size segments are another way of comparing the two indexes in expected growth. Size isn’t a direct influence on the Barron’s 400 Index because it is equally weighted. However, grouping by market value does offer insights into relative corporate performance.

Median 1Q 2017 Estimate vs. Median 1Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 9.76% 5.47% 5.95% 4.37%
Large Cap ($3 bln-$10 bln) 9.20% -3.19% 7.36% 1.84%
Mid Cap ($1 bln-$3 bln) 8.66% N.A. 7.29% N.A.
Small Cap ($500m-$1 bln) 5.19% N.A. 6.69% N.A.
Micro Cap (< $500 mln) 2.14% N.A. 10.09% N.A.

The eyebrow-raiser in this table is the S&P 500’s forecasted EPS decline for large caps. This segment’s revenue-growth prediction is underwhelming, too. It’s difficult to know what the cause might be, and whether this is a one-time incident or an incipient trend.

The good news for the Barron’s 400 is the growth expectations for small and micro-cap stocks. They struggled throughout the past year, and it’s good to see them with rising earnings and revenue. The only fly in that ointment is that the big revenue-growth forecasts yield smaller—much smaller in the case of micro caps—projected EPS gains. Perhaps these companies have to pay higher wages to attract workers, or they aren’t able to raise their prices in competitive markets. Whatever, they are looking brighter than they have been for a while.

Of course there is the possibility of a slip twixt the anticipation and the actual. We will tote up the score when the reporting is mostly completed. For now, though, it looks like the Barron’s 400 companies will be living up to their reputations.

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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