Barron's 400 Index (B400)

Barron's has created a new index, called the Barron's 400 index, appropriately enough. Intended as a tool for predicting which stocks will appreciate the most, the index is based on a stock grading algorithm developed by MarketGrader, a company founded in 1999 and based in Florida. Using its formula, MarketGrader assigns a numerical grade that ranges from 0 to 100 to each stock in the DJ Wilshire 5000 index and is based on 24 fundamental and stock-performance indicators that are grouped under growth, value, cash flow, and profitability. The grade depends only on the algorithm and the data—there is no human input. The following table shows the components used in determining the numerical grade.

GrowthValueProfitabilityCash Flow
Long-term Market GrowthCapital StructureAsset UtilizationCash Flow Growth
Short-term Market GrowthP/E AnalysisCapital UtilizationEBIDTA Margin
Relative Price StrengthPrice/Book RatioOperating MarginsDebt/Cash Flow Ratio
Growth PotentialPrice/Cash Flow RatioRelative MarginsInterest Coverage Capacity
Earnings MomentumPrice/Sales RatioReturn on EquityEconomic Value
Earnings SurpriseMarket ValueQuality of RevenuesRetention Rate

The Barron's 400 index selects 400 stocks with the highest grades from this list, but with some limitations. Excluded are real estate investment trusts and companies lacking financial reports in the past 6 months. The number of stocks from any 1 group is capped at 20%. For liquidity, selected stocks must have a minimum average daily trading volume of at least $2,000,000 and a minimum market capitalization of $250,000,000. As a group, 25% of the stocks must have a market value of at least $3 billion.

The index includes companies of all sizes and from all sectors, but because of low MarketGrader scores, there are no utilities and only 1 telecom stock in the current index.

The sector components of the B400 index as of August 24, 2007. (Format: Sector, number of companies in sector, and percentage of index.)
Pie chart showing the sector distribution of the B400 index.
Source for figures: Dow Jones Indexes.

The B400 is equally weighted and indexed to 100 for December 31, 1997. The index for 8/24/2007 was 321.04.

The index is rebalanced on the 3rd Friday of March and September. Using back-testing over the past 10 years, the turnover rate would have averaged 40% every 6 months, which equals an equivalent average of about 160 stocks that would be replaced, and which has also equaled 30% of the market cap over the back-testing period. The average holding period for stocks over the past 10 years is 2 years. Only Abercrombie and Fitch (symbol: ANF) and Harley-Davidson (HOG) would have been in the index from the start.

The size distribution of the B400 index, as of August 24, 2007.
Pie chart showing the size distribution of the B400 index.
Source: Dow Jones Indexes

The average MarketGrader score for the B400 was 65, whereas it was 62 for the Dow, 54 for the S&P, and 42 for NASDAQ stocks. Naturally, the B400 would have the highest score since the stocks for the index were selected for high scores. Whether it will be a better forecaster for growth remains to be seen. However, the B400 would have easily beaten the other market indexes over the past 10 years, and over the past 3 years, it has surged 58%. Dow Jones is expected to use the index as a basis for an ETF and possibly other financial products in the near future.