The Barron’s 400 Index enters the second half of the year in pretty solid financial shape after grinding its way up to a 4.2% gain through yesterday’s close in what has been a pretty rocky first half of the year for equities. This puts it almost a third of the way to our year-end prediction gain of about 15%, assuming a market rise of about 9%, outlined in our January 24 Newsletter. While it might seem a tall order for the index to gain another 10 points in only six months, we still believe that an uptick in nominal GDP growth from the dismal first quarter might just help it at least surpass the 10% mark for 2014, especially considering that its constituents are still reasonably valued. Current B400 components are currently trading at 16.4 times trailing earning per share, actually below the 19.5 trailing P/E for the equally-weighted version of the S&P 500. When using estimates for the next two years, B400 trades at forward multiples of 16.8 and 14.8, respectively, compared to 17.7 and 15.7 for the S&P 500 EW. Perhaps more importantly, B400 companies continue to boost operating margins without having to sacrifice growth, which should be conducive to higher profits the rest of the year if economic growth acceleration does indeed materialize. John Prestbo breaks down B400 margins by sectors and market cap segments against some of the market benchmarks in the column that appears below.

From a growth perspective, B400 continues to show a knack for finding growth companies that trade at reasonable prices. That B400 constituents have grown earnings per share by an average 31.5% in the last three years, according to FactSet, should not come as a surprise to habitual followers of the index; what should matter most to them, perhaps, is the expectation of EPS growth for the next three years, which will ultimately dictate how much higher the index can go. FactSet estimates that B400 companies will grow earnings at a 14% clip over the next 3-5 years. This, of course, refers to the current set of constituents, which will be rotated again in September. Nevertheless, such numbers bode well for future index performance.

Happy First Birthday to the Barron’s 400 ETF

The Barron’s 400 ETF (NYSE Arca: BFOR), an ALPS Advisors fund, celebrated its first birthday two weeks ago, on June 4. And what a year it’s been. The ETF became one of the ten most successful ETF launches of 2013 according to both Morningstar and Morgan Stanley. It has gathered a tad under $250 million in assets in a year and has attracted investors from all corners of the market. Perhaps most important from our vantage point, the fund, up 26% in the last year, hast tracked the index’ one year gain of 27% pretty closely. Investors may read more about the fund at www.Barrons400ETF.com. Here’s to many more years of success!

B400 Companies Push Profit Margins Higher

By John Prestbo – 05/30/2014

Companies in the Barron’s 400 Index are boosting their capacity to turn revenues into profits, which puts them in excellent position to make the most of any acceleration in economic growth.

We measure this trend with two versions of profit margins. Operating margin is the proportion of a company’s revenue that is left over after paying for variable costs of production such as wages, raw materials, etc. Interest and taxes aren’t included in this calculation. The other kind is net margin, which is based on net profit after all expenses, including interest and taxes, are deducted from revenue. Obviously, net margins tend to be lower than operating margins.

Here is how the Barron’s 400 companies’ margins compare to those in two brand-name indexes and to those in the universe of U.S. stocks:

	Median Operating Margin		Median Net Margin
	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos
	Thru 5/29/14	Thru 5/29/13	Thru 5/29/14	Thru 5/29/13
Barron’s 400	19.60	17.17	12.38	10.47
S&P 500	16.43	15.94	10.01	9.50
DJ Industrials	21.68	18.61	14.16	12.90
Universe	8.85	8.62	4.72	4.70

Note that the margins have improved in the three indexes and the universe. This confirms that the U.S. economy is getting stronger. The more important point is that while the Dow Jones Industrials have the highest margins, the Barron’s 400—with 370 more stocks—isn’t far behind. The margins of S&P 500 companies are not only lower but also didn’t improve as much as Barron’s 400 components.

Profit margins vary by industry. Here is how margins compare within the Barron’s 400:
 

	Median Operating Margin		Median Net Margin
	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos
	Thru 5/29/14	Thru 5/29/13	Thru 5/29/14	Thru 5/29/13
Consumer Discretionary	12.99	13.08	8.75	8.22
Consumer Staples	14.12	14.38	9.32	9.04
Energy	28.82	22.82	18.77	17.35
Financials	33.69	29.82	23.29	18.53
Health Care	27.08	22.50	17.41	16.60
Industrials	14.48	13.26	10.06	8.49
Materials	16.39	12.95	12.10	9.87
Technology	21.32	19.41	14.13	13.02

Operating margins for the two consumer sectors declined over the past year. Consumers have tightened their purse strings, so both retailers and product manufacturers have had to compete more aggressively with sales and discounts to attract customers. Net margins did improve for these sectors, however. All other sectors show improvements across the board, with nice increases in evidence for energy, financials and health care companies.

The stock-size comparisons of Barron’s 400 companies may be slightly surprising:
 

	Median Operating Margin		Median Net Margin
	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos	Trailing 12 Mos
Size by Market Cap	Thru 5/29/14	Thru 5/29/13	Thru 5/29/14	Thru 5/29/13
Large: >$14 billion	21.72	19.95	15.26	12.39
Mid: $14 bill to $3.9 bill	17.40	15.69	11.08	10.04
Small: <$3.9 billion	19.73	17.13	12.42	10.62

Large companies lead the profit-margin rankings, followed by small and mid-sized. Because stocks of mid-sized companies frequently outperform, it’s a little unexpected to find them with the smallest margins. Perhaps their growth requires them to increase overhead costs faster than revenue.

The recent trend in profit margins underscores just one of the financial strengths of Barron’s 400 companies. It’s an important attribute because profit growth is how the market keeps score, more often than not. Margin expansion augurs well for future Barron’s 400 performance.