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B400 Predicted to Trounce S&P 500 in 3Q Growth

John A. PrestboJohn A. Prestbo

The economy showed renewed signs of strength in the third quarter. Securities analysts noticed, and set about predicting solid earnings and revenue gains for many companies. Those in the Barron’s 400 Index are expected to grow their per-share earnings and revenue from the year-ago period by nearly 90% more than those in the S&P 500.

Analysts’ forecasts don’t always pan out, of course, but they do tend to become more accurate as quarterly financial report start rolling in. Here is how the predictions stand:

Median 3Q 2017 Estimate vs. Median 3Q 2016 Actual
EPS Revenue
Barron’s 400 9.40% 8.71%
S&P 500 4.95% 4.60%

Typically, analysts start out optimistic, and then trim their expectations as the period approaches and ends. They did that with predicted third-quarter per-share earnings—much more for the S&P 500 than for the Barron’s 400. In light of the strengthening economy, they actually raised revenue forecasts over the past six months. The increase wasn’t significant for the S&P 500 but was substantial for the Barron’s 400:

Median Est. Change Over Past Six Months
EPS Revenue
Barron’s 400 -1.08% 5.74%
S&P 500 -6.12% 0.14%

MarketGrader selects Barron’s 400 companies twice annually for their high scores in 24 factors of financial strength, which includes demonstrated capability of growth. The equally weighted index includes companies of all sizes above a market capitalization of $250 million, and mid-cap stocks constitute its largest size segment. The S&P 500 consists of large and very large stocks, weighted by market cap. The smallest has a market cap of $3.4 billion. These stocks are vetted for profitability in the selection-by-committee process but not other financial measurements. Many investors use the S&P 500 as a proxy for the U.S. stock market.

The stronger predicted growth of Barron’s 400 companies shows up no matter how they are categorized. We use sectors and size segments in addition to the overall indexes. That isn’t to say the Barron’s 400 prevails in every case, but the S&P 500 “wins” fewer categories and by usually smaller margins. Here is the breakdown by sector:

Median 3Q 2017 Estimate vs. Median 3Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 7.13% 6.03% 6.14% 3.96%
Consumer Staples 7.16% 1.10% 3.69% 2.74%
Energy 22.35% 60.71% 32.00% 13.24%
Financials 9.84% 4.22% 3.35% 1.56%
Health Care 10.87% 5.80% 12.68% 5.27%
Industrials 5.79% 6.40% 7.65% 5.14%
Materials 11.14% 7.17% 13.23% 4.56%
Technology 15.61% 8.24% 15.11% 5.34%
Telecommunications -17.82% -3.67% -5.92% 0.04%
Utilities N.A. -2.41% N.A. 6.43%

Predicted per-share earnings growth favors the Barron’s 400 in seven out of 10 sectors. Energy shows the strongest expected growth because the sector is rebounding from a prolonged supply glut. The S&P 500’s large energy companies skidded more and thus are recovering more strongly than the wider size range of Barron’s 400 companies. Somewhat the same phenomenon is seen occurring in Industrials, wherein the S&P 500’s less financially strong components are forecast to outgrow the Barron’s 400 roster. The third sector, Telecommunications, is very small and beset by fierce competition for wireless phone customers; the Barron’s 400 has only two components in this sector. And it has none at all in Utilities from the most recent rebalancing last month.

In predicted revenue growth, the Barron’s 400 dominate—in some cases by large margins—in eight of ten sectors. The exceptions are Telecom and Utilities. Four sectors (Consumer Discretionary, Consumer Staples, Financials and Technology) show the Barron’s 400 is forecast to convert their sales gains into even larger profit growth.

Size segmentation is a predicted clean sweep for the Barron’s 400 in the two categories shared with the S&P 500:

Median 3Q 2017 Estimate vs. Median 3Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 12.95% 5.45% 8.58% 4.90%
Large Cap ($3 bln-$10 bln) 7.03% 0.33% 10.15% 1.19%
Mid Cap ($1 bln-$3 bln) 8.86% N.A. 8.99% N.A.
Small Cap ($500m-$1 bln) 10.13% N.A. 7.63% N.A.
Micro Cap (< $500 mln) -30.36% N.A. 0.65% N.A.

Predicted growth is concentrated in the larger market caps, although the Barron’s 400 small-cap segment is expected to do very well. The micro-cap companies apparently continue to struggle with higher overhead that was incurred to cope with inconsistent sales increases.

When third-quarter reports are mostly in, we’ll return with a summary of reality versus forecasts.

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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