Seeking Companies with Strong Growth at Attractive Valuations

Key Takeaways

» In 2025, the Hennessy Focus Fund delivered strong absolute performance driven by the market’s deepening appreciation for our companies’ business opportunities.

» In our view, sustained investor focus on technology and AI-driven stocks has created opportunities in financial services, consumer discretionary, basic materials, industrials, and traditional business services.

» We have a favorable outlook as we anticipate solid earnings growth for our holdings driven by company-specific developments, deregulation, consistent fiscal spending, tax incentives and a favorable monetary outlook.

» We assess the impact of the tariffs on our portfolio’s corporate earnings as modest, largely because the majority of our holdings are domestically focused or service-oriented businesses.

» Our “best ideas” portfolio is better suited for an environment that values long-term business resilience over short-term sentiment.

Would you share your perspective on the 2025 market?

In 2025, we navigated a market defined by macro noise—ranging from aggressive tariff announcements to shifting interest rate expectations—but remained steadfast in our commitment to owning a small collection of truly great, durable businesses. While the broader indices faced bouts of extreme volatility, our portfolio delivered strong absolute performance, finishing the year with a return of 27.22% for our Institutional Class shares. This performance was not driven by chasing short-term trends or market timing, but rather by the market’s deepening appreciation for our companies’ business opportunities.

The key to our success this year was the resilience of high-conviction names like AST SpaceMobile and Brookfield Corporation. Additionally, while some sectors struggled with trade policy uncertainty, many of our service-oriented and domestically focused holdings remained well-insulated, allowing them to gain market share as smaller, less-resilient competitors faltered. We viewed the year’s periodic price swings not as a threat, but as an opportunity to selectively enlarge our positions in companies we believe are underappreciated by the market and poised for mid-teens compounded earnings growth.

Looking forward, our perspective remains optimistic because we focus on what is “knowable”: the quality of management, returns on capital, and the long-term growth runways of our businesses. We expect that as the Federal Reserve continues to normalize policy and the “re-engineering” of global supply chains matures, the market will increasingly reward the durable, secular growth stories that form the core of our portfolio. Our strategy continues to be built on the belief that by owning businesses that can reliably compound their intrinsic value, we can weather short-term macroeconomic storms and deliver strong results for our shareholders over a multi-year horizon.

Has sustained investor focus on technology and AI-driven stocks in 2025 created valuation or opportunity gaps elsewhere in the market?

Yes. This has occurred in many industries that are not dominated by the Magnificent 7 or downstream recipients of their AI related spending. Underappreciated areas include financial services, consumer discretionary, basic materials, industrials, and traditional business services. The S&P 500 provided a total return of 17.9% in 2025, and was valued at approximately 24x 2026 operating earnings at the end of 2025, well above the 18x long-term average. But if you exclude the ten largest companies (trading around an average of 34x forward operating earnings), the remaining 490 stocks clock in at about 17x forward earnings, just under the index’s long-term average.

Many of the Fund’s largest holdings are in the industries/sectors mentioned above and collectively trade more in line with the first 490 members of the S&P 500. We underwrite each holding in the Fund using five key bottom-up criteria: quality of the business, quality of management, growth opportunities, valuation, and tail risk. We do not allocate assets by sector or industry classification. Our goal in managing the Fund is to generate a mid-teens or better long-term compounded return over time.

Looking to 2026, we have a favorable outlook for the Fund as we anticipate solid earnings growth for our holdings driven by company-specific developments, deregulation, consistent fiscal spending, tax incentives in the One Big Beautiful Bill and a favorable monetary outlook.

To what extent have tariffs affected corporate earnings of your holdings?

To date, we assess the direct impact of the tariffs on our portfolio’s corporate earnings as modest, largely because the majority of our holdings are domestically focused or service-oriented businesses. However, a few holdings faced notable headwinds: Applied Materials faced a projected $400 million revenue headwind in fiscal 2025 due to new export restrictions to China. Additionally, RH, which sourced 72% of its purchasing volume from Asia, reported that tariffs have significantly pressured financial results, contributing to an adjusted operating margin contraction of 3.4% year-over-year. In response to tariffs, RH has aggressively reallocated its portfolio by reducing Chinese sourcing to just 2% of purchasing volume and increasing domestic production in North Carolina. While a recent federal delay on specific furniture duties until 2027 provides temporary relief, we believe tariffs present a headwind that requires continuous pricing and supply chain adjustments.

Conversely, this trade environment serves as a distinct tailwind for O’Reilly Automotive. As the administration’s tariffs drive up the price of new vehicles and the price of aftermarket parts, consumers are encouraged to maintain their existing used vehicles for longer periods. This structural shift in consumer behavior boosts demand for aftermarket auto parts, positioning O’Reilly to benefit from the very policies that create headwinds elsewhere in the economy.

We have not made any allocation changes to the portfolio in direct response to these trade developments. Instead, we rely on our strategy of owning durable, well-run businesses capable of turning adversity into opportunity and adapting to macroeconomic surprises. Rather than trading around these events, we remain focused on our long-term investment criteria and continue to research businesses sold off due to tariff volatility.

Would you please discuss the Fund’s top performers and bottom detractors over 2025?

The Fund’s top contributors during the year were AST SpaceMobile, Applied Materials, and Brookfield Corporation. AST had a year of solid progress toward its goal of providing global mobile wireless coverage. Applied Materials had a record financial year and appears well positioned to benefit from a semiconductor “supercycle” fueled by AI buildout. Brookfield Corporation continued to produce strong fundraising and investment performance while concerns about its office real estate portfolio subsided.

Top detractors were Cogent Communications, CarMax, and RH. Cogent missed its ambitious growth goals for its new wavelength service, resulting in a dividend cut. CarMax fell further behind its key competitor, Carvana, and lost industry market share. RH made forward progress in sales and earnings, but suffered from the perceived and actual impact of substantial new tariffs on imported furniture.

With the bifurcated spending patterns between affluent and less affluent customers in 2025, how have you evaluated the resilience and demand drivers of the Fund’s consumer-oriented holdings?

The Fund has no consumer-oriented holdings singularly exposed to America’s less affluent consumers. For example, we have no holdings in subprime auto or insurance, extreme discounters, or Medicaid dominated healthcare services providers. In fact, the Fund’s consumer-oriented holdings have modest or even negligible exposure to less affluent customers; instead, their sales mix over indexes to affluent households and their much more stable spending patterns.

For example, demand for O’Reilly Automotive’s aftermarket parts is driven by maintenance and repair needs of vehicle owners. Most Americans, both affluent and less affluent, use their cars daily to drive to work and spend at their own fairly predictable levels to maintain their vehicles. RH sells luxury household furniture and household goods to American and European consumers, but less affluent customers are a modest part of their business. Similarly, CarMax sells to all types of consumers, but less affluent customers make up less than 20% of their sales and financing business. CarMax maintains a wide breadth of inventory so they are relevant to both affluent and less affluent customers with the goal of winning lifetime customers as incomes and needs change over time.

Would you please discuss how Brookfield’s launch of a $100 billion global AI Infrastructure program influences your conviction in the position?

Brookfield is in a very fortunate position. They already have huge businesses providing real estate, power, electricity transmission, and data centers to large customers. AI infrastructure needs all of these inputs, at scale, to be successful. As a result, we think Brookfield will be a partner of choice for many hyperscale technology companies and sovereign entities looking to build out AI infrastructure. This is a clear positive development for the business. Brookfield estimates over $7 trillion dollars of investment will be needed to build out global AI infrastructure over the next decade. So, this $100 billion fund is a nice start, but we believe Brookfield will have additional opportunities beyond this. Still, Brookfield already manages over $1 trillion in assets, so AI infrastructure will be just one of several growth opportunities for the firm. This is why we like our Brookfield investment so much; it has many growth drivers without dependence on any single one for attractive long-term results.

Looking ahead, what market conditions would be most supportive or most challenging for your investment approach?

The most supportive market for our approach in 2026 is one where macro noise fades and investors return to rewarding individual business fundamentals. Our approach thrives when stock prices are driven by the specific compounding power of a company’s earnings rather than shifting headlines about the Federal Reserve or geopolitical volatility. As we move into 2026, an environment of stable interest rates and a “normalization” of the yield curve would be ideal, as it allows the market to recognize the mid-teens cash earnings growth of our high-conviction holdings—businesses that we believe offer strong growth at more attractive valuations than much of the broader market.

The most challenging conditions for us would be a market defined by irrational melt-ups or a narrow speculative frenzy, as our disciplined investment approach prevents us from chasing overvalued stocks, which may lead us to hold more cash if we cannot find a sufficient discount to intrinsic value. Furthermore, a landscape dominated by extreme macro-driven market declines would be a headwind; in those periods, investors often sell indiscriminately—exiting even high-quality businesses and ignoring structural advantages and