Following the most recent annual rebalance of the Hennessy Cornerstone Mid Cap 30 Fund, portfolio manager Ryan Kelley uncovered a couple compelling investment themes.
Kelley discussed these themes during the Hennessy Fund’s annual outlook meeting. Kelley has been a portfolio manager on this fund for over a year, joining Neil Hennessy who’s been managing the fund since inception.
The Hennessy Cornerstone Mid Cap 30 Fund (HFMDX for the investor class; HMDX for the institutional class) is a concentrated portfolio of purely mid-cap stocks. The fund focuses on undervalued companies that have proven sales and earnings growth.
The fund utilizes a quantitative formula to select a concentrated portfolio of 30 domestic, mid-cap stocks with the highest 12-month price appreciation. These stocks must also have a market capitalization between $1 and $10 billion; a price to sales ratio below 1.5; annual earnings higher than the previous year; and positive stock price appreciation, or relative strength, over three- and six-month periods.
There are two compelling investment themes in particular that Kelley said the fund is looking at going into 2019. “Within those themes we’re finding forgotten brands and turnaround stories to reinvest in,” he added.
First Theme: Consumer Spending
Consumer spending has been increasing “very nicely,” Kelley said.
According to Kelley, consumer spending has increased eight consecutive months, month-over-month.
“There was one blip in March and then prior to that consumer spending was increasing nicely as well,” he added.
Kelley partly attributes the increased consumer spending to faster wage growth, a “very robust” job growth market, and good consumer confidence.
“They all work together but essentially if you have people with jobs, people making more money and good consumer confidence – you see increased spending,” Kelley said.
Kelley gave two different examples of companies that are benefitting from this theme of increased consumer spending.
“They’re both traditional retail type companies. They’re both companies in transition, and they both have done very well this year but for two very different reasons,” he said.
The first company Kelley gave as an example is the shoe manufacturing company Crocs (CROX). According to Kelley, Crocs has been closing down some of their stores and right-sizing their business.