Navigating Markets with Hennessy Funds' Ryan Kelley
Barron's Live
Deep Dive
What makes Hennessy Funds unique in its investment approach?
Hennessy Funds, established in 1989, manages about $5 billion in assets across 16 mutual funds and one ETF. The firm takes a long-term view of investing, focusing on a repeatable and consistent investment process that can outlast portfolio managers. Their flagship fund, the Hennessy Cornerstone Mid-Cap 30 Fund, uses a formulaic approach combining momentum, valuation, and earnings growth to select stocks.
What is the investment formula used by the Hennessy Cornerstone Mid-Cap 30 Fund?
The fund's formula starts with 5,000 publicly traded companies, filters out ADRs, and narrows down to companies with market caps between $1 billion and $10 billion. It then applies fundamental metrics like price-to-sales ratios below 1.5x, annual earnings growth, and positive stock price momentum over the last 3, 6, and 12 months. The top 30 stocks based on one-year price appreciation are selected for the portfolio.
Why does Hennessy Funds focus on mid-cap stocks?
Mid-cap stocks are attractive due to their more reasonable valuations compared to large-cap and small-cap stocks. These companies typically have a solid track record, multiple business lines, and are domestically focused. They are also large enough to be acquisition targets for larger companies, making them a compelling investment opportunity.
What is Ryan Kelley's market outlook for 2025?
Ryan Kelley has a subdued outlook for the market into 2025, citing lofty valuations across many companies. However, he notes strong fundamentals like a robust labor market, wage growth, and healthy GDP growth. Hennessy Funds' consensus is for the S&P 500 to potentially rise by up to 10% next year.
What is the outlook for the Japanese market according to Hennessy Funds?
Hennessy Funds is relatively bullish on Japan, where inflation of 1.5% to 2% is seen as positive after years of deflation. Corporate governance reforms, including efforts to increase shareholder returns and ROEs, are also driving optimism. The country's significant financial assets, with $7.5 trillion sitting in banks earning minimal returns, present long-term investment opportunities.
What are the key concerns surrounding NVIDIA's upcoming earnings report?
NVIDIA's earnings are highly anticipated, with expectations of $0.75 per share and $33 billion in sales. However, concerns include whether the company can meet or exceed its guidance of $36 billion for Q4 revenue and potential issues with its new Blackwell chips, which have reportedly faced overheating problems. The stock's performance is seen as a bellwether for the AI and tech sectors.
What is the significance of Peloton in Hennessy's portfolio?
Peloton, despite its decline from pandemic highs, was added to the Hennessy Cornerstone Mid-Cap 30 Fund due to its low price-to-sales ratio of 0.7x and recent momentum. The stock has since risen by about 25%, making it a 4% holding in the fund. Hennessy's process focuses on deep value and momentum, often identifying turnaround stories like Peloton.
How does Hennessy Funds handle stocks that grow beyond mid-cap size?
Hennessy Funds buys stocks within the $1 billion to $10 billion market cap range. If a stock appreciates beyond this range, it is held until the next annual rebalance. For example, Supermicrocomputer grew to a 12-13% position in the fund before being sold during the 2023 rebalance, despite its continued rise afterward.
How does Hennessy Funds' approach differ from traditional sector-based investing?
Hennessy Funds' Cornerstone Mid-Cap 30 Fund focuses on individual stock selection based on valuation and momentum rather than sector bets. About 80% of the fund's performance comes from stock-specific factors rather than sector trends. This approach has consistently outperformed the S&P 500 over various timeframes.
What is the impact of macroeconomic factors on Hennessy Funds' stock selection?
Macroeconomic factors like interest rate shifts or inflation trends do not influence Hennessy Funds' stock selection process for the Cornerstone Mid-Cap 30 Fund. The fund relies on a quantitative, formula-based approach focused on company fundamentals, which has delivered strong performance over 21 years.
- Hennessy Funds' establishment in 1989
- 5 billion in assets under management
- 16 mutual funds and one ETF
- Long-term, active management, long-only approach
- Formulaic approach for Mid-Cap 30 Fund combining momentum, valuation, and earnings growth
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