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Here's How The S&P 500 Boosts Sales When The Economy Stinks

Nov 4, 2013, 20:43 IST

REUTERS/Lucy NicholsonA man competes, as a police helicopter circles above, at the Muscle Beach Independence Day bodybuilding contest on Venice Beach in Los Angeles, California, July 4, 2013.

With the economy still looking anemic, investors are wondering where growth will come from.

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Surprisingly, sales growth in the S&P 500 has actually been accelerating.

But don't be fooled. This is not all organic growth, i.e. growth from existing operations. Companies in the S&P 500 are buying growth via mergers and acquisitions.

"Earnings season has nearly ended and many stocks that drove S&P 500 revenue growth in 3Q owe their strong top-line growth to acquisitions," wrote Goldman Sachs' David Kostin in a new note to clients.

"Year/year revenue growth equaled just 1% in first-half 2013 but surged to 5% in 3Q," added Kostin. "Notably, just 20 companies accounted for 25% of aggregate sales but 50% of growth. 18 of the 20 firms completed acquisitions during the past year. The 20 stocks boosted 3Q sales by 13% versus just 2% for other firms."

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The good news is that corporations are using their cash for something.

The bad news is that these deals distort the growth message being sent by the S&P 500.

Here's more from Kostin:

The list of 20 stocks boosted revenues by 13% year/year in aggregate compared with just 2% for the other 369 non-Financial or Utility S&P 500 firms. Examples include Aetna, which lifted sales by 46% from 3Q 2012 and noted on its earnings conference call that the increase came "primarily from the addition of Coventry." Freeport-McMoRan reported 40% sales growth, noting that it benefitted from "a significant contribution from a full quarter of results from the recently acquired oil and gas business."

The S&P 500 effectively becomes the S&P 501 or S&P 502 with each respective acquisision.

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There's nothing evil or misleading about growing through acquisitions. In theory, companies will only make these deals if they think it'll benefit them.

Often times, acquisitions generate cost-saving synergies. For example, call-centers and warehouses will be consolidated. Unfortunately, this also means layoffs.

All of this reminds us that the S&P 500 and the economy are not the same thing.

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