The Barron’s 400 Index was reconstituted last Friday after the stock market closed, following its customary bi-annual rebalance schedule. A total of 177 new companies were added to the index as replacements for 173 that were removed and four that were the subject of mergers or acquisitions during the course of the most recent rebalance period between March and last week. The new additions amount to a 44.25% portfolio turnover, only slightly above the historical turnover average of 42%.
A total of 62 companies were selected to B400 for the very first time while 88 companies have remained in the index for at least two consecutive years. 27 companies, which could be dubbed the B400 ‘elite,’ have been selected to the index at least 20 times. The list appears below.
Current B400 Components with at Least 20 Selections
| Ticker | Company Name | Number of Selections |
| MSFT | Microsoft Corp. | 30 |
| WMT | Wal-Mart Stores, Inc. | 30 |
| AMGN | Amgen Inc. | 28 |
| BBBY | Bed Bath & Beyond Inc. | 27 |
| HD | The Home Depot, Inc. | 27 |
| IBM | International Business Machines Corp. | 27 |
| NKE | Nike, Inc. | 27 |
| ORCL | Oracle Corp. | 27 |
| PEP | PepsiCo, Inc. | 27 |
| COH | Coach, Inc. | 24 |
| FDS | FactSet Research Systems Inc. | 24 |
| ROST | Ross Stores, Inc. | 23 |
| CTSH | Cognizant Technology Solutions Corp. | 22 |
| DLTR | Dollar Tree, Inc. | 22 |
| GPC | Genuine Parts Co. | 22 |
| FAST | Fastenal Co. | 21 |
| JCOM | j2 Global, Inc. | 21 |
| MCD | McDonald’s Corp. | 21 |
| TJX | The TJX Companies, Inc. | 21 |
| UNH | UnitedHealth Group Inc. | 21 |
| VAR | Varian Medical Systems, Inc. | 21 |
| WFC | Wells Fargo & Co. | 21 |
| AAPL | Apple Inc. | 20 |
| RMD | ResMed Inc. | 20 |
| SBUX | Starbucks Corp. | 20 |
| STR | Questar Corp. | 20 |
| TROW | T. Rowe Price Group | 20 |
Among the newcomers, not necessarily for the first time but relative to the March selection, the ten largest companies by market cap are Berkshire Hathaway (BRK.B), Visa (V), Comcast (CMCSA), Schlumberger (SLB), US Bancorp (USB), Honeywell International (HON), Eli Lilly (LLY), Anadarko Petroleum (APC), EOG Resources (EOG) and Capital One Financial (COF). The ten largest companies, by market cap, that were removed from the index were Exxon Mobil (XOM), Chevron (CVX), Procter & Gamble (PG), Philip Morris International (PM), Intel (INTC), CVS Caremark (CVS), Altria Group (MO), Accenture (ACN), Monsanto (MON) and Colgate Palmolive (CL). You may view the complete list of B400 components here.
Consumer Discretionary, Financials and Industrials Are B400’s Top Sectors The strong showing by Consumer Discretionary stocks in recent B400 selections continued during the most recent rebalance, even if it may seem like the sector lost the most companies from last period; this, however, is simply due to a realignment of the industry classification system used by B400 since the last rebalance. To summarize, prior to May of this year, MarketGrader adhered to the Industry Classification Benchmark (ICB) in applying the sector cap of 20% when making the B400 selections, whereas now we use our own industry classification system, which we call MGCS. ICB classifies consumer-oriented companies into Consumer Goods and Consumer Services while we break them down into Consumer Staples and Consumer Discretionary instead. Following the switch to MGCS earlier this year resulted in B400 having 93 companies in the Consumer Discretionary sector, as many of the companies previously classified as Consumer Goods and Consumer Services ended up in the same sector. In Friday’s rebalance Consumer Discretionary once again reached its cap of 20% of the index, or 80 companies, even though this is a 13-company reduction from the previous selection. Nevertheless, the sector is once again the one with the highest representation in B400.
Financials, which perhaps represents the biggest sector surprise in the new selection, saw a net increase of 18 companies relative to the March rebalance to a total of 73 and now accounts for 18.25% of the index, the second largest sector in B400. Industrials, despite a reduction of eight companies, came in third, with a total of 72 companies, or 18% of the index.
The two biggest sector declines as a result of the new selection (without counting Consumer Discretionary for the reason explained above) took place in Health Care and Technology, which lost 12 and 11 companies respectively. Below you may see the sector changes from the March rebalance to the current one.
B400 Sector Breakdown – March 2013 Selection
B400 Sector Breakdown – September 2013 Selection
New Selection Means Higher Grades Since MarketGrader’s overall grade—calculated based on 24 indicators measuring every company’s strength in growth, value, profitability and cash flow—is the primary factor used in selecting the members of B400, it is no surprise that the index’s average grade climbs after every rebalance. Last week’s reconstitution injected a fresh dose of highly graded companies to replace those whose grades may have eroded in the course of the last six months. Considering B400’s strong performance since the March rebalance, up 15% over this six month period and 28% year to date, it is not surprising that a few of the strongest performers this year were excluded from the new selection as a result of valuations that have become a bit stretched. A few examples of these include 3D Systems Corp. (DDD), Illumina Inc. (ILMN) and Sinclair Broadcast Group Inc. (SBGI), all of which have gained more than 60% since March. The 177 newcomers to the index have an average grade of 66.3 compared to an average grade of 54.8 for the 173 that are being deleted. The result of this is an average grade of 68.1 for the reconstituted B400 compared to 63.0 prior to the rebalance.
From a fundamentals perspective, the improvement is also clear. The new B400 has an average return on equity of 36% compared to 30% for the previous selection. The average earnings yield of the new portfolio is 7.2% while for the prior one it was 5.9%. Operating margins, net margins and average dividend yield are also all higher for the reconstituted index. Notably, the new B400 components have an average forward P/E ratio of 17.9 compared to 25.2 for the March selections. Readers may view a complete breakdown of B400’s fundamentals here.
The new B400 sports an average market cap of $17.8 billion while the median is $3.8 billion. On average, based on trailing 3-month data, all B400 components in the new selection see $108 million worth of their shares traded every day, underscoring the index’s liquidity. The median three-month dollar based traded volume is $31 million per day.
