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B400 Predicted to Trounce S&P 500 in 1Q 2018 Results

John A. PrestboJohn A. Prestbo

The world economy grew briskly in the first quarter of this year. Securities analysts expect evidence to show up in companies’ generally strong sales and earnings reports that will gush forth this month and next. While growth is expected to fatten many a corporate top- and bottom-line, the growth-oriented, financially strong companies in the Barron’s 400 Index are once again forecast to lead the pack.

Here are the median forecasts compared with median actual results in the first quarter of 2017:

Median 1Q 2018 Estimate vs. Median 1Q 2017 Actual
EPS Revenue
Barron’s 400 22.54% 10.90%
S&P 500 15.95% 5.57%

It’s instructive to see what the two sets of companies are predicted to make from their expected revenue growth. Companies in both indexes are forecast to double and nearly triple their rates of revenue increase in rates of per-share earnings growth. That’s great news. However, the Barron’s 400 companies are forecast to squeeze out more than 650 additional basis points of earnings per share from their 533-basis-point predicted advantage in extra revenue. This is testimony both to how well run these companies are and to their long-term growth commitments.

The forecasting follies continue with a look at how median prognostications have changed over the past six months. The surge in economic strength wasn’t widely anticipated, so rather than trim year-over-year expectations as they usually do analysts raised their outlooks as time passed—and not by trivial amounts. Here are the median changes:

Median Estimates Over Past Six Months
EPS Revenue
Barron’s 400 9.15% 5.94%
S&P 500 5.07% 2.52%

Unsurprisingly, sector-level forecasts also favor the Barron’s 400. In two cases—median per-share earnings for consumer discretionary and staples—the Barron’s 400 is predicted to outstrip their S&P 500 counterparts by more than 10 percentage points. Big gaps are expected in revenue, too, especially in energy and health care. Here are the details:

Median 1Q 2018 Estimate vs. Median 1Q 2017 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Consumer Discretionary 21.61% 11.54% 8.17% 4.38%
Consumer Staples 18.98% 8.88% 8.47% 3.71%
Energy 46.34% 65.12% 36.77% 19.09%
Financials 26.19% 18.88% 5.01% 1.27%
Health Care 15.20% 12.94% 19.10% 7.45%
Industrials 21.27% 18.31% 9.92% 5.87%
Materials 18.86% 17.35% 10.21% 8.89%
Technology 22.53% 18.13% 14.91% 7.03%
Telecommunications 3.66% 17.05% 6.44% 4.84%
Utilities 2.43% 5.75% 10.38% 3.17%

On the earnings per share side, the S&P 500 is forecast to trounce the Barron’s 400 in energy as the industry scrambles back from its oversupply depression. Although, it must be said, predicted energy sector growth for the Barron’s 400 doesn’t look shabby, particularly because in the March rebalance 13 more companies were added for a total of 43. (The S&P 500 has 32, unchanged from last year.) At the depths of the oil depression, the Barron’s 400 had as few as 11 energy companies. As more and more of them got back into good financial shape, measured by MarketGrader’s 24 metrics, they qualified to be added to the index. The S&P 500 also dominates expected earnings growth in telecommunications and utilities. Telecom isn’t significant for either index, while utilities are important only for the S&P 500.

As for revenue forecasts, the S&P 500 fails to field a single sector winner—even in those sectors where it is expected to edge out the Barron’s 400 in earnings growth. This suggests that the S&P 500’s predicted dominance in those cases is due more to weak year-earlier results than to organic growth.

The prediction data offer no surprises when viewed by company size, as the following table shows:

Median 1Q 2018 Estimate vs. Median 1Q 2017 Actual
Earnings per Share Revenue
Barron’s 400 S&P 500 Barron’s 400 S&P 500
Mega Cap (>$10 billion) 24.75% 16.42% 9.77% 6.08%
Large Cap ($3 bln-$10 bln) 22.51% 14.30% 11.78% 3.39%
Mid Cap ($1 bln-$3 bln) 18.61% -38.96% 12.19% -1.26%
Small Cap ($500m-$1 bln) 25.28% N.A. 9.71% N.A.
Micro Cap (< $500 mln) 9.44% N.A. -0.57% N.A.

Every comparable size segment is expected to come out in favor of the Barron’s 400. Pay no attention to the mid-cap comparison because the S&P 500 has only three companies that have dipped into that segment. The more noteworthy element is the predicted continued renaissance of small- and micro-cap stocks. Last year they struggled under heavy overhead costs that new business failed to surmount.

There is many a slip between forecast and reality, so we will check back in a couple of months to see how things turned out. At this point, however, the Barron’s 400 seems to be where the growth is.

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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