Investors wondering where B400 might best fit in their portfolio, particularly from a style perspective, should take a look at how the index is broken down into companies with dominant growth or value characteristics, our subject for today’s column. Rather than using traditional growth or valuation metrics, such as EPS growth or historical P/E values, for example, we typically use what many of our subscribers, particularly those familiar with MarketGrader’s app for Bloomberg, know as the “Growth Spread” or “Value Spread.” We’ll explain.
Since MarketGrader’s methodology consistently grades companies across 24 indicators that are broken down into Growth, Value, Profitability and Cash Flow categories, our analysis already accounts for many of the individual growth and value metrics that may be used in identifying dominant style factors. Combined with our thinking that Profitability and Cash Flow should always be included in any thorough style analysis, we think the best way to measure style tilts is by simply changing the weights of the Growth and Value indicators for each company in order to arrive at overall Growth and Value grades as a complement to our ‘balanced’ overall grade. Let’s take two current B400 members as examples. The first one, Shutterstock, Inc. (SSTK) sports a MarketGrader overall grade of 67.7. When growth is weighted more heavily than value, the overall ‘growth’ grade becomes 77.2, a direct result of our Growth grade of ‘A.’ When value is weighted more heavily than growth, the overall ‘value’ grade becomes 47.8, a direct result of our Value grade of ‘C.’ The difference between the two ‘style’ overall grades, or 29.4, is what we call our ‘Growth Spread.’ From this perspective we consider this a ‘Growth’ stock.
The second company, Western Refining, Inc. (WNR) currently receives an overall grade of 62.5 from MarketGrader. Its ‘Growth Spread’ is-33.3, which is the same as saying that its ‘Value Spread’ is 33.3, both clearly the result of a Growth grade of ‘D’ and a Value grade of ‘A-.’ This would warrant a ‘Value’ stock label for this company in a style breakdown.
Since B400 has aptly been described by Barron’s as a twist on ‘GARP’ (Growth at a Reasonable Price), a breakdown of the distribution of all spreads among current components is very useful in illustrating how the index straddles the growth vs. value divide quite nicely through our unique bottom-up, fundamentals-based stock selection process. The chart below displays the current breakdown.
The chart illustrates a pretty normal bell-shaped distribution, with the vast majority of companies concentrated in the middle, with growth spreads ranging between -15 and +15. In fact 301 companies fall within this range, a tad over 75% of all index components. Not surprisingly, it is anything below -15 (from a value perspective) or above +15 (from a growth perspective) that we consider relatively extreme. Based on this breakdown we see, then, that 43 companies land within the extreme value category while 56 appear within the extreme growth category. What does this mean? During periods of market ebullience, driven by momentum and growth investors, companies at the growth end of the distribution typically dominate. When the opposite occurs, and investors favor value over growth, companies in the value end of the spectrum should tend to dominate although this doesn’t come across as clearly in the short term as when growth stocks dominate (by the very nature of momentum and growth investors compared to value investors).
A close look at the top companies in B400 today at each end of the value and growth spectrums not only adds color to our analysis but provides our readers with picks on both camps. Below we list the top 10 companies in each category.
Top 10 Growth Spreads
| Ticker | Name | Overall Grade | Growth Spread |
| FLT | FleetCor Technologies | 68.8 | +41.1 |
| MDSO | Medidata Solutions | 63.6 | +35.6 |
| MIDD | The Middleby Corp. | 62.7 | +34.4 |
| AZPN | Aspen Technology | 77.9 | +33.3 |
| REGN | Regeneron Pharmaceuticals | 78.2 | +30.0 |
| AFCE | AFC Enterprises | 76.2 | +29.4 |
| SSTK | Shutterstock | 67.7 | +29.4 |
| WETF | Wisdomtree Investments | 70.7 | +27.8 |
| RRC | Range Resources | 63.8 | +27.8 |
| FOXF | Fox Factory Holding | 54.2 | +27.8 |
Top 10 Value Spreads
| Ticker | Name | Overall Grade | Growth Spread |
| CVRR | CVR Refining LP | 68.4 | -37.8 |
| WNR | Western Refining | 62.5 | -33.3 |
| CJES | C&J Energy Services | 64.7 | -31.7 |
| MPC | Marathon Petroleum | 60.1 | -31.1 |
| DK | Delek US Holdings | 61.2 | -29.4 |
| MGLN | Magellan Health Services | 57.9 | -28.3 |
| CVI | CVR Energy | 69.2 | -26.1 |
| HFC | Hollyfrontier Corp. | 70.8 | -25.0 |
| CAT | Caterpillar Inc. | 60.9 | -25.0 |
| PIR | Pier 1 Imports | 56.9 | -25.0 |
A closer look at the sector breakdown within this distribution analysis reveals not only market trends currently playing out among specific economic sectors but also how B400 is playing them. We therefore looked at the number of companies in each sector with a growth or value tilt and then calculated how much of their overall sector representation within B400 falls in either category. For example, take financials, the sector with the largest representation increase following B400’s September rebalance. A total of 73 companies in the index belong to this sector yet they are not evenly distributed between growth and value stocks. In fact, 47 financials, or 64.4% of all stocks in the sector within B400 are in the growth camp while only 26 stocks, or 35.6% are in the value camp. A simple conclusion drawn from this may be that B400 bet correctly on financials to be among the leaders during the current expansive market cycle. This, however, is premature given that barely a month and a half has passed since the rebalance yet it is useful in illustrating what this breakdown may represent. Below we display the growth and value stock breakdown of all stocks in each sector within B400, ranked from highest to lowest representation.
Growth Breakdown
| # Stocks | Sector | Percentage of Total Sector in B400 |
| 22 | Health Care | 64.70% |
| 47 | Financials | 64.40% |
| 31 | Technology | 56.40% |
| 35 | Industrials | 48.60% |
| 10 | Consumer Staples | 47.60% |
| 37 | Consumer Discretionary | 46.30% |
| 16 | Energy | 41.00% |
| 4 | Materials | 18.20% |
Value Breakdown
| # Stocks | Sector | Percentage of Total Sector in B400 |
| 18 | Materials | 81.80% |
| 23 | Energy | 59.00% |
| 42 | Consumer Discretionary | 52.50% |
| 11 | Consumer Staples | 52.40% |
| 36 | Industrials | 50.00% |
| 22 | Technology | 40.00% |
| 26 | Financials | 35.60% |
| 12 | Health Care | 35.30% |
Admirers of financial symmetry should appreciate the fact that the top two sectors, by representation within B400, among growth stocks, Heath Care and Financials, are the last two in the Value category; while the top two sectors in Value, Materials and Energy, are the bottom two sectors in the Growth breakdown. And for the avid GARP fans among our readers or those insistent on finding a strategy that successfully straddles growth and value without compromising on market cap and sector diversification, they could do worse than follow B400.
Barron’s 400 ETF (BFOR) Options Now Listed on the CBOE
To mitigate the risk of downside movement in owning the BFOR ETF, investors can use put and call options listed on the Chicago Board Options Exchange (CBOE). The exchange offers a variety of strike prices ranging from 20 – 30 and expiration months of November, December, February, and May. Buy “writes” can generate income and put purchases can be used to immunize against adverse downside price movement. See CBOE attached link: http://www.cboe.com/DelayedQuote/QuoteTable.aspx?TICKER=BFOR&ALL=2
Correction
Last week’s B400 Newsletter incorrectly stated that B400 had gained 10.4% during the month of October. The index, in fact, gained 3.76% during the period. Our apologies to our readers for this error. For complete up to date B400 performance please click here.
