What is the Hennessy Cornerstone Growth Fund’s investment strategy?
The Fund utilizes a formula-based approach to build a portfolio of attractively valued, growth stocks whose stock prices are exhibiting strong relative strength. In essence, the strategy seeks to combine elements of both value and momentum investing. From the universe of stocks in the S&P Capital IQ Database, the Fund selects the 50 stocks with the highest one-year price appreciation that also meet the following criteria:
» Market capitalization exceeding $175 million
» Price-to-sales ratio below 1.5
» Annual earnings higher than the previous year
» Positive stock price appreciation over the past three- and six-month periods
Why does the Fund use these screening criteria?
The Fund uses a sales-based value criterion because sales are more difficult to manipulate than earnings. The price-to-sales ratio works well under many conditions, including when a company’s profitability may be temporarily depressed or when earnings may be artificially inflated.
Higher year-over-year earnings helps identify growth stocks, i.e. companies that are operating successfully in growth markets, gaining market share, or increasing their profitability.
Positive price appreciation over three- and six-month periods generally reflects market recognition of improving underlying fundamentals in the near term.
Why does the formula select stocks with the highest one-year price appreciation?
From among the companies that meet the screening criteria, the Fund selects the 50 with the highest one-year price appreciation. We believe this ranking by relative share price strength can be a good predictor of future price appreciation, or outperformance.
How does the Fund seek to provide a return to investors?
We believe the Fund’s investments present the potential for capital appreciation as a result of earnings growth and potentially higher valuations.
How often does the Fund rebalance its portfolio?
The universe of stocks is re-screened and the portfolio is rebalanced annually, generally in the winter. Holdings are weighted equally by dollar amount with 2% of the Fund’s assets invested in each.
How does the Fund’s portfolio differ from its benchmark?
Compared to its benchmark, the Russell 2000® Index, the Fund has substantial overweight positions in the Industrials, Energy, Consumer Discretionary and Materials sectors. Conversely, and importantly, the Fund is significantly underweight both Health Care and Financials.
The Fund’s largest sector weighting is Industrials, at 16 holdings, which we believe could experience a period of increased revenues and profitability as inflation abates and global economic demand increases. Energy, comprised of 13 individual stocks, down from 17 last year, could continue to benefit from higher energy prices, significantly higher cash flows, higher profitability, and benefits to shareholders through dividends, share repurchases, and pay down of higher costing debt.
The Fund also has significant exposure to Consumer Discretionary and Materials companies, both of which could benefit from an improving economic outlook and production, and increased consumer spending and demand for goods on a global basis.