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What’s the Point of the Barron’s 500?
By JLP | May 12, 2009
This week’s Barron’s featured the 11th Annual Barron’s 500. What is the Barron’s 500? Well, I’ll let Barron’s explain it (emphasis mine):
The Barron’s 500, a unique ranking of the 500 largest (by sales) public companies in the U.S. and Canada, is prepared by HOLT, a unit of Credit Suisse. The survey compares companies on the basis of three equally weighted measures: median three-year return on investment based on cash flow, which HOLT refers to as CFROI; change in the latest fiscal-year CFROI relative to the three-year median; and sales growth in the latest fiscal year, adjusted for acquisitions and divestitures. Companies then are graded A through F for each metric, with the change in one-year CFROI used to break ties and determine final scores. (For more on HOLT’s methodology, please see “Barron’s 500 Methodology” at the end of this article.) Barron’s 500 results don’t reflect the views of Credit Suisse analysts.
Barron’s made one important change to this year’s survey: We asked Holt to eliminate any measure of stock-price performance as a variable in grading and ranking companies, in order to focus solely on companies’ operations, not the vagaries of the market. As usual, we eliminated companies operating under bankruptcy protection, and knocked off those that effectively were nationalized amid last year’s financial crisis, such as American International Group (ticker: AIG), Fannie Mae (FNM) and Freddie Mac (FRE).
Here is this year’s top ten:
Notice all the “NRs” in the 2008 Ranking Column. “NR” means the company wasn’t ranked in 2008. In other words, 40% of this years top ten companies weren’t even ranked last year. Not only that, check out where 2008′s top ten ranked in 2009:
All but two of last year’s top ten companies dropped out of the this year’s top ten list! Three of the companies dropped all the way down to the mid-200s!
Yes, last year was murder for most stocks. However…isn’t the point of the Barron’s 500 to find solid companies that will perform well in both good and bad times? Yes, according to Barron’s:
Great companies don’t perform well only in good times. They also deliver when times are tough. And 2008 was about as tough as it’s been in decades for the economy and the stock market.
Yet the companies that landed at the top of the 11th annual Barron’s 500 did a superb job of increasing sales and generating cash flow, even amid a global recession. Most have fortresslike balance sheets, too, and are renowned for conservative management. MasterCard, at No. 1 on our list this year, is sitting on $2.3 billion, or roughly $17 a share, in cash — it has almost no debt — and reported a 9% rise in first-quarter operating income. Not many companies, including most blue chips, can boast that.
It seems to me that had the methodology worked, we wouldn’t have seen such dramatic changes in the rankings from one year to the next. Right?
Investing in hindsight never seems to work…
Topics: Investing | 1 Comment »
May 12th, 2009 at 10:54 am
Can you explain to me how companies with grades of “D or lower” in certain categories even made the list in 2008? Those seem to be the companies that plummeted the most in the rankings.