When the U.S. stock market opens today, the Barron’s 400 Index will have 153 new members following its latest semi-annual rebalance, which was completed at the close of trading last Friday. Additionally, its 400 constituents will once again be equally weighted, each one accounting for 0.25% of the index. The latest shuffle represents a turnover of 38.25%, below the index’s historical 42% average. And while the index now includes 153 companies that were not a part of it during the last six months (although some of them had been chosen in the past), only 147 of them are displacing prior members. The other six are substituting companies that were removed from the index during the course of the last rebalance period as a result of corporate actions such as mergers and acquisitions. Here’s a closer look at the most recent rebalance.
The 147 companies removed last Friday did very well by the index in terms of performance. On average, since the September rebalance, they had a return of 12.7%, a smidge below the index’s 13.0% return (through March 18, when the new selections were made). Many of them, as you may suspect, simply priced themselves out of the index. The table below shows the top ten performers among this group along with their grade at last week’s selection date and their performance for the period since September.
| Ticker | Company Name | Market Cap | Overall Grade | Performance |
| LGND | Ligand Pharmaceuticals | $1.64 billion | 61.8 | 80.35% |
| AMBC | Ambac Financial Group | $1.47 billion | 58.2 | 67.43% |
| AMBA | Ambarella, Inc. | $836.5 million | 62.3 | 66.57% |
| AUXL | Auxilium Pharmaceuticals | $1.54 billion | 23.5 | 64.96% |
| ALXN | Alexion Pharmaceuticals | $35.8 billion | 61.3 | 60.84% |
| AAP | Advance Auto Parts | $9.19 billion | 60.8 | 57.85% |
| PZZA | Papa John’s International | $2.30 billion | 62.6 | 52.87% |
| DK | Delek US Holdings | $1.92 billion | 36.1 | 52.25% |
| MPC | Marathon Petroleum | $27.7 billion | 62.4 | 49.45% |
| SLCA | U.S. Silica Holdings | $1.98 billion | 62.1 | 48.27% |
For perspective, the lowest grade among all companies in the reconstituted index was 64.4. The new average grade of all B400 components is now 70.9. The average grade among all deletions was 56.3 while the average grade among all additions was 67.5. Nothing, in our opinion, illustrates the importance of MarketGrader’s fundamental analysis in the composition of the index better than these grades. In a stock market with more than 4,700 publicly traded companies, such as the U.S., such selection process ensures the index is really made up of the cream of the crop. Barron’s likes to refer to it as a “stockpicker’s index” and we won’t argue with that.
Some of the notable names among those that have now departed B400 include TripAdvisor, Yahoo, Northrop Grumman, Wells Fargo and JPMorgan Chase. This is not to say they won’t return when they make the grade again; in fact several of them have been selected to B400 on numerous occasions.
Among the new crop of index components, 41 have made it for the very first time. Among the better-known names in this group are Facebook, KKR & Co., Kraft Foods, Lions Gate Entertainment and CBS Corp.
Among the entire selection list of all 400 components it is worth noting that 88 companies have been selected to B400 for at least two consecutive years while 27 companies have been selected at least 20 different times (or 10 years overall), although not necessarily in consecutive periods.
Sector Rotation Is Relatively Small
Consumer Discretionary continues to be the sector with the highest index representation, in terms of number of components, with 80, or 20% of the index, the maximum allowed. Technology had the biggest net gain, adding seven new components to its roster for a total of 62 companies. Materials was close behind, with a net gain of six companies. It nevertheless continues to be one of the smallest sectors in B400, which is not surprising considering how poorly this sector has fared in the last couple of years as the world’s appetite for natural resources and raw materials has waned. The sector with the biggest net loss of components was Financials, with six net departures, followed closely by Energy and Health Care, each losing five names apiece. The charts below depict the sector allocation for B400 in the prior period and the one about to begin.
Further proof of the index’s broad diversification can be seen in the number of sub-industries represented. Out of 130 sub-industries covered by MarketGrader’s research, 103 are represented in the newly reconstituted B400, up from 99 in the prior six-month period. A single company represents 24 of them while seven are represented by at least 10 companies. Such broad representation, in our opinion, also reflects the diversity—and underlying strength and resilience—of the U.S. economy. The table below illustrates all sub-industries with at least eight companies in the new B400.
| Sector | Sub-Industry | # of Companies |
| Financials | Investment Managers | 17 |
| Energy | Oil & Gas Production | 15 |
| Consumer Discretionary | Specialty Stores | 11 |
| Financials | Finance/Rental/Leasing | 11 |
| Materials | Chemicals: Specialty | 11 |
| Health Care | Biotechnology | 10 |
| Technology | Data Processing Services | 10 |
| Financials | Property/Casualty Insurance | 9 |
| Technology | Information Technology Services | 9 |
| Consumer Discretionary | Apparel/Footwear Retail | 8 |
| Consumer Discretionary | Other Consumer Services | 8 |
| Energy | Oilfield Services/Equipment | 8 |
| Financials | Regional Banks | 8 |
| Industrials | Industrial Machinery | 8 |
| Industrials | Trucks/Construction/Farm Machinery | 8 |
| Technology | Internet Software/Services | 8 |
In terms of size, companies along the entire market cap spectrum are also very well represented in B400. Based on the new selection list, the index’s average market cap is $18.18 billion while the median market cap is $4.27 billion; both are pretty close to the average and median for the period just ended, although slightly below. This could well be explained by the strong performance of many of the companies that were removed at this rebalance, which of course results in bigger, and in some cases inflated, market caps. Through last Tuesday, when the selections were made, B400’s average and median market cap were $20.10 billion and $4.33 billion respectively. Among the current list of components, 19 have a market cap greater than $10 billion, 40 above $50 billion, 116 above $10 billion and 335 above $1 billion. While B400’s broad sub-industry representation speaks of the breadth of U.S. capital markets, its market cap breakdown says much about their depth.
Rock Solid Fundamental Foundation
Collectively, all B400 components now sport a price to earnings ratio, based on 12-month trailing figures, of 15.0 while their average and median forward P/E ratios are 20.6 and 17.6 respectively, putting the index once again squarely in the “growth” area of the stock market, much like we have written about several times in recent months in both the B400 Diary and in this newsletter. Companies in the new B400 had average revenue of $10.25 billion in the last 12 months and average operating and net income of $1.71 billion and $1.21 billion respectively. A few other figures worth highlighting: average debt to capital ratio of 28.6%; average return on equity of 50.5% and average operating margin of 22.8%.
In concluding, we welcome all new and returning members of the Barron’s 400 Index. For those that missed the cut, there is always a next rebalance in September and with it an opportunity to make this coveted list of “America’s Most Promising Companies.”
