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Analysts Predict B400 to Grow 2Q Profits, Revenue More than S&P 500

John A. PrestboJohn A. Prestbo

Companies whose stocks are in the Barron’s 400 Index again are expected to report bigger second-quarter gains in earnings per share and revenue than those in the S&P 500. That’s according to the predictions of securities analysts who follow the companies for investors.

The forecast margin of outperformance in per-share earnings isn’t as large as it has been in the recent past, indicating a partial recovery of profitability for the S&P 500. But in top-line growth, the Barron’s 400 is predicted to sprint comfortably into the lead. Here is the estimate box score for the second quarter:

Median 2Q 2017 Estimate vs. Median 2Q 2016 Actual
EPS Revenue
Barron’s 400 7.25% 7.05%
S&P 500 5.91% 3.58%

As usual, analysts started out optimistically and then trimmed their estimates as the second quarter wore on and wound down. That is, they lowered expectations in all but one instance, which lends extra credence to the Barron’s 400 companies’ ability to sell their products and services. Again, however, the differences are narrower than they have been. The following table has the details:

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -2.61% 0.79%
S&P 500 -3.49% -0.43%

At the sector level, predictions unsurprisingly favor the Barron’s 400. Here also is revealed the source of the S&P 500’s expected profitability comeback. Here are the forecasts, industry by industry:

Median 2Q 2017 Estimate vs. Median 2Q 2016 Actual 
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 6.24% 1.00% 5.91% 3.30%
Consumer Staples 9.22% 4.98% 5.38% 2.40%
Energy 0.53% 69.45% 17.66% 23.46%
Financials 8.57% 6.70% 2.76% 1.45%
Health Care 5.57% 5.95% 9.81% 4.07%
Industrials 4.40% 5.61% 7.14% 4.83%
Materials 10.33% 3.73% 6.00% 4.38%
Technology 10.44% 8.70% 8.75% 5.67%
Telecommunications N.A. -3.10% N.A. -1.97%
Utilities -18.64% 2.83% 1.18% 2.45%

Energy is the sector where the S&P500 is expected to rebound with major per-share earnings and revenue growth. Of course, gains this size are possible only because of the blood-bath declines in sales and profits of this industry over the past couple of years. Indeed, those declines were much of the reason the Barron’s 400 has done so much better than the S&P 500 in the past several quarters. Now, though the industry downturn continues, the S&P 500’s energy companies have regained some control of their costs so that an uptick in sales translates into stupendous percentage-point profit recovery.

There is another factor that plays into this scenario. Because the Barron’s 400’s purpose is to measure the stock prices of financially strong, growth-oriented companies of all sizes, the number of energy companies can vary sharply. It depends on how many companies excel in MarketGrader’s semiannual financial-strength assessment. In recent selection periods that number has fallen considerably. Meanwhile, the S&P 500, which aims to measure the representation of mega- and large-sized stocks in the overall market, maintains a fairly consistent component count—including the oil companies that fared badly in the downturn. In short, while the S&P 500 was more exposed to the slump than the Barron’s 400 it also benefits far more in a weak and possibly temporary recovery.

Company size is another way to analyze the growth projections. Even though the Barron’s 400 is equally weighted, size is important because the stocks of different-sized companies tend to move in uncorrelated fashion in the stock market. Here is a table showing second-quarter predictions by market capitalization ranges:

Median 2Q 2017 Estimate vs. Median 2Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 9.96% 6.77% 6.59% 4.19%
Large Cap ($3 bln-$10 bln) 5.73% -2.24% 7.12% 1.10%
Mid Cap ($1 bln-$3 bln) 5.20% N.A. 8.32% N.A.
Small Cap ($500m-$1 bln) 5.83% N.A. 4.13% N.A.
Micro Cap (< $500 mln) -6.25% N.A. 6.36% N.A.

The mega-cap giants are expected to grow significantly in both indexes. For the Barron’s 400, even bigger gains are predicted for large-cap and mid-cap revenues. However, the mid-cap segment—the largest in this index—stumbles a bit in converting the foreseen top-line sales spurt into per-share earnings. Small-cap does better at this for the Barron’s 400, but not as good as mega-caps. For the S&P 500, the projected decline in second-quarter profits is worrisome, as is the tepid revenue gain for that segment.

There can be upside surprises and downside disappointments from estimates as the companies post their second-quarter results. We’ll keep track and give details when the vast majority have reported.

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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