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B400 Poised to Report Stronger Growth Than S&P 500 in 4Q 2017

John A. PrestboJohn A. Prestbo

As fourth quarter 2017 financial reporting gets under way, companies in the Barron’s 400 Index once again are expected to out-grow those in the S&P 500 in both per-share earnings and revenue. But with global economic growth picking up speed, the S&P 500 is showing more strength than in recent quarters.

Securities analysts are estimators not fortunetellers, so their predictions sometimes veer wide of reported results. Still, there isn’t any viable alternative, which means we pay attention anyway. Here are the medians of their recent estimates compared to the median actual results in the fourth quarter of 2016:

Median 4Q 2017 Estimate vs. Median 4Q 2016 Actual
EPS Revenue
Barron’s 400 10.53% 9.35%
S&P 500 8.84% 5.49%

Analysts frequently make predictions far in advance, adjusting them as the quarter in question draws near and then happens. Usually they start out optimistically and gradually become less so. This time, they followed precedent with per-share earnings forecasts but actually raised revenue outlooks. In both cases, however, the adjustments were minor:

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 -0.95% 1.99%
S&P 500 -1.70% 1.93%

It is at the sector level that the S&P 500’s signs of strength show up. Two sectors—energy and industrials—are predicted to go in the S&P 500’s favor for per-share earnings, though not for revenue. The anticipated margin is huge in energy because the S&P energy sector is enjoying a profit renaissance following an extended battering as oil prices plunged two and a half years ago and then slowly began to recover. S&P has 32 stocks in its energy sector, including all the big names, with a median market capitalization of $22 billion. By contrast, the Barron’s 400 almost doubled its energy sector at the last rebalancing in September to 30 stocks, many of them small, with a median market cap of $3.5 billion.

The two indexes are expected to be much closer in the industrials sector. However, the S&P 500 is foreseen topping the Barron’s 400 by 113 basis points in per-share earnings. Here are the sector expectations:

Median 4Q 2017 Estimate vs. Median 4Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 5.68% 4.32% 6.07% 4.76%
Consumer Staples 13.71% 6.31% 6.10% 3.21%
Energy 20.79% 87.60% 23.40% 16.20%
Financials 10.15% 8.49% 2.44% 2.46%
Health Care 10.90% 8.63% 11.36% 6.19%
Industrials 6.76% 7.89% 9.43% 5.46%
Materials 21.33% 20.26% 13.15% 9.25%
Technology 15.14% 11.06% 14.55% 7.10%
Telecommunications -66.58% -1.30% -9.86% 2.89%
Utilities N.A. 10.00% N.A. 6.42%

This table suggests telecommunications is another sector in which the S&P 500 is forecast to dominate. However, the sector is tiny in both indexes—three companies for the S&P (albeit including AT&T Inc. and Verizon Communications Inc.) and two for Barron’s (Verizon again and a small-cap company, ATN International, Inc .). Much more important for S&P is its 28-company utilities sector, in which strong growth is forecast for per-share earnings and moderate growth for revenue. The Barron’s 400 has no utilities since the September rebalancing.

While the sector view of forecasts indicates where the S&P 500 may show strength, the company-size view reveals a pocket of potential weakness in its large-cap segment. The S&P 500 consists overwhelmingly (88%) of mega-cap stocks, which have valuations of $10 billion and up. Its contingent of large-cap stocks (market caps of less than $10 billion but more than $3 billion) has shrunk over the long bull market to just 12%. The median predicted profit per share for S&P’s large caps is lower than the median posted a year earlier.

Median 4Q 2017 Estimate vs. Median 4Q 2016 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 14.23% 9.84% 10.19% 6.01%
Large Cap ($3 bln-$10 bln) 8.58% -2.17% 11.29% 1.95%
Mid Cap ($1 bln-$3 bln) 7.69% N.A. 6.90% N.A.
Small Cap ($500m-$1 bln) 10.57% N.A. 5.97% N.A.
Micro Cap (< $500 mln) 6.76% N.A. 4.42% N.A.

By contrast, the Barron’s 400 is expected to report solid gains in both per-share earnings and revenue, handily surpassing the S&P 500’s anticipated growth in the two comparable size segments. In addition, the Barron’s 400 can boast solid expected contributions from its smaller segments—including small caps and micro caps, whose growth at best has been meager lately or at worst stuck in reverse.

In a couple of months we’ll know whether these forecasts proved prescient. A summing-up tally will be forthcoming then. Meanwhile, the reasonably priced, growth-oriented companies in the Barron’s 400 appear on track to report robust growth for the 2017 fourth quarter.

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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