When U.S. markets opened for trading last Monday morning, the Barron’s 400 Index debuted its updated constituent lineup, having replaced 149 companies, or 37.3% of its roster. While this turnover is well below the index’s historical average of 41.6%, the changes underlying this latest reconstitution, especially at the sector level, speak volumes about the persistent strength of the U.S. economy, as MarketGrader continues to find plenty of value among the industries that stand to gain the most from continued domestic strength.
Financials and Industrials once more top the list of sectors with the highest index representation, both having reached again the 20% cap (80 names), as they did during B400’s last reconstitution in March. For Financials, this represents the ninth consecutive period (four and a half years) in which the sector has been maxed out, by far the longest streak on record for any sector since B400’s base date in December 1997. This run stands in stark contrast to the sector’s nadir, reached nine and a half years ago when the market bottomed in March 2009. During that same month’s reconstitution only 20 Financials were selected to B400, the sector’s lowest count ever. And while a couple of large banks made the latest cut, including JPMorgan Chase & Co. (JPM) and PNC Financial Services Group (PNC), the overall sector representation is decidedly mid-cap, with a median market capitalization of $3.7 billion (average market cap is $15.3 billion). In fact, 42 of the companies in the sector are Regional Banks, with a median and average market capitalization of $3.1 and $6 billion, respectively. So, while owners of financial assets reevaluate the effects the Fed’s ongoing rate normalization program may have on the value of their holdings, a partial return to monetary normalcy seems to be working wonders for the smaller banks that ply their trade the old fashioned way: by taking deposits, making loans and earning the spread.
The story among Industrials is a similar one, with the median and average market cap for the 80 companies from the sector at $3.2 billion and $10.6 billion respectively, underscoring an across-the-board renaissance of the animal spirits powering the country’s industrial base. And while a little more than half of the Index’s exposure to Financials was confined to a single industry, as noted above, B400’s Industrial sector constituents represent 19 different industries ranging from Aerospace & Defense to Auto Parts Manufacturers, Building Products, Engineering and Construction, Railroads and Trucking, to name a few.
The other B400 sector worth highlighting is Energy, which has made a steady comeback in the Index, where it had reached as few as 13 companies in March 2016 as oil prices cratered and overleveraged oil producers struggled to keep pace with expensive cost structures. B400 navigated the situation nicely, trimming allocations to the sector as company financials deteriorated rapidly, dropping its exposure to Energy stocks from 9.5% in the spring of 2015 to 3.3% a year later. This week’s rebalance, on the other hand, marks the fifth consecutive period in which the index has increased its Energy exposure, having selected 47 names to the current index, an allocation of almost 12%, above the sector’s historical allocation of 9% since 1997. Among the current crop of Energy companies in B400 there are four Coal companies (yes, coal!), 13 Oil & Gas Pipelines, 16 Oil & Gas Producers, eight Oil Refiners/Marketers and six Oilfield Services/Equipment companies. Figure 1 shows B400’s latest changes across all sectors compared to the March 2018 class and in the context of the index’s historical sector breakdown.
Figure 1. B400 Sector Changes In Latest Rebalance, September 21, 2018
| March 2018 | September 2018 | Net Gain or Loss |
10 Yr. Average | ||||
| Sector | Companies | % | Companies | % | Cos. | % | |
| Consumer Discretionary | 54 | 13.50% | 63 | 15.75% | +9 | 73 | 18% |
| Consumer Staples | 17 | 4.25% | 11 | 2.75% | -6 | 20 | 5% |
| Energy | 43 | 10.75% | 47 | 11.75% | +4 | 37 | 9% |
| Financials | 80 | 20.00% | 80 | 20.00% | – | 58 | 14% |
| Health Care | 31 | 7.75% | 26 | 6.50% | -5 | 47 | 12% |
| Industrials | 80 | 20.00% | 80 | 20.00% | – | 67 | 17% |
| Materials | 22 | 5.50% | 25 | 6.25% | +3 | 21 | 5% |
| Technology | 67 | 16.75% | 63 | 15.75% | -4 | 69 | 17% |
| Telecommunications | 2 | 0.50% | 0 | 0.00% | -2 | 2 | 1% |
| Utilities | 4 | 1.00% | 5 | 1.25% | +1 | 6 | 2% |
Source: MarketGrader Research
Changes Across Size Segments
From a size perspective, 116 companies with a market capitalization above $10 billion were selected to B400, accounting for 29% of all constituents. This represents an increase of 10 companies relative to the March 2018 rebalance. Mid caps, or in this case companies with a market cap between $1 billion and $10 billion, once again accounted for the lion’s share of the Index with 220 names, or 55% of the total. Lastly, only 64 companies with a market cap below $1 billion were selected to B400, four below the total selected in March, the lowest count for small cap stocks in B400 ever. Companies with a market cap greater than $1 billion now represent 84% of the new B400.
The newly reconstituted B400 has an average market cap of $19.6 billion and a median market cap of $4.0 billion. The largest company is Apple, with a market cap of $1.05 trillion and one of 12 companies with a market cap exceeding $100 billion. The smallest company in the new B400 is Gold Resource Corp., valued at $267 million. Since B400 is equally weighted, every company accounted for 0.25% of the overall index when the market opened on Monday, September 24th.
For more on the Barron’s 400 Index, including its full component list and a complete breakdown by sector, industry and market cap, as well as up to date performance, investors may visit http://www.barrons.com/400. For more on the health of U.S. companies’ earnings and how B400 members stack up against the S&P 500’s constituents please make sure to visit John Prestbo’s B400 Diary.
The Bull Market & the Barron’s 400
Our colleague Francis Gupta has just published a terrific piece on the performance of the Barron’s 400 during what is now “the longest bull market in history.” In it he analyzes the source of the Index’s returns and ponders whether its significant outperformance over the S&P 500 was a matter of ‘dumb’ luck in allocating to the right market segments, or whether stock selection might have had something to do with it. While our regular readers might predict Francis’s conclusion, we suggest all B400 followers take a few minutes to read through his analysis.
