Finding Attractive Investments Focusing on Growth, Valuation and Momentum

In the following commentary, the Portfolio Managers of the Hennessy Cornerstone Growth Fund discuss the Fund’s formula-based investment strategy and how it drives the Fund’s sector and industry positioning.

 

July 2025
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Portfolio Manager

What is the Hennessy Cornerstone Growth Fund’s investment strategy?

The Fund utilizes a formula-based approach in building a portfolio of attractively valued stocks whose stock prices are exhibiting strong relative strength. 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 help identify attractive companies, including those that are operating successfully in growth markets, gaining market share, or increasing 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.

What is the Fund’s current market cap?

As of June 30, 2025, the Fund has a median market cap of approximately $6.3 billion, the largest it has been for over a decade. We are pleased that historically, this small-cap Fund has performed well against its peers when the market cap is higher than average. For example, in all the past years where the market cap was above its 10-year average of $3.0 billion, the Fund’s annual rank was in the top quartile (25%) or better.

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 increasing 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 significant weightings in the Financials, Consumer Staples, and Communication Services. While the next largest weighting is Industrials, we note that they it is underweight the benchmark by about 8.4%. Lastly, the Fund has holdings in all sectors except Materials.

The Fund’s largest sector weighting is Financials, at almost 28% of the portfolio, with a significant allocation to insurance, mainly property and casualty but also life and health. Consumer Staples, at 21% of the portfolio, and Communication Services, at almost 14%, round out the top three sectors and comprise nearly two-thirds of the portfolio. In general, these three sectors, and especially the individual stocks in the portfolio, are generally viewed as more defensive in nature and less volatile in times of uncertainty. Given that the most recent portfolio rebalance occurred after the disruptions in the global equity markets due to tariff announcements, we believe the Fund’s sector allocations reflect the tumult in the market thus far in 2025.

Morningstar Percentile Rankings represent a fund’s total return percentile rank relative to its Morningstar Category. The highest percentile rank is 1 and the lowest is 100. It is based on Morningstar total return, which includes both income and capital gains or losses and is not adjusted for sales charges or redemption fees. The Fund (HICGX) was ranked 16%, 1%, and 4% among 610, 554, and 398 Morningstar Small Blend Funds over the 1-, 5- and 10-year periods, respectively as of 6/30/25, based on total return. © 2025 Morningstar. All Rights Reserved. The information contained herein:(1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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The Funds' investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 1-800-966-4354.

Performance data quoted represents past performance; past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the Fund may be lower or higher than the performance quoted and can be found here. Performance data current to the most recent month end may be obtained from HennessyFunds.com Hennessy Funds Standardized Performance

Neither forward earnings nor earnings growth is a measure of a fund’s future performance.

Mutual fund investing involves risk. Principal loss is possible. Current and future holdings are subject to risk. Small and medium-sized companies may have more limited liquidity and greater price volatility than larger companies. Investments in foreign securities may involve political, economic, and currency risks, greater volatility, and differences in accounting methods. The Focus, Total Return, Balanced, Large Cap Financial, Small Cap Financial, and Midstream Funds are considered non-diversified funds. A non-diversified fund, which may concentrate its assets in fewer individual holdings than a diversified fund, is more exposed to individual stock volatility than a diversified fund. A fund that concentrates its investments within one country, one sector, or a small group of industries, such as Japan, Technology, Financials, or Energy, may be subject to a higher degree of market risk. Investments in debt securities typically decrease in value when interest rates rise. The risk is greater for longer-term debt securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities. Mortgage- and asset-backed securities are subject to prepayment risk, which is the risk that the borrower will prepay some or all of the principal owed to the issuer. Funds that invest in pooled investment vehicles (including ETFs) may experience higher fees. The formula-based strategy employed by some Funds may cause those Funds to buy or sell securities at times when it may not be advantageous.

ETFs are subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an ETF’s shares may trade at a premium or discount to its net asset value, an active secondary trading market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a Fund’s ability to sell its shares. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns.

ESG investing risk is the risk stemming from the Environmental, Social, and Governance factors that the Fund applies in selecting securities. The Fund intends to invest in companies with measurable high ESG ratings relative to their sector peers, and screen out particular companies that do not meet its ESG criteria. This may affect the Fund’s exposure to certain companies or industries and cause the Fund to forego certain investment opportunities. The Fund’s returns may be lower than other funds that do not seek to invest in companies based on ESG ratings. The Fund seeks to pursue its investment objective by using proprietary models that incorporate quantitative analysis. There is no guarantee that the Portfolio Managers’ use of these models will result in effective investment decisions for the Fund. From time to time, the Fund may concentrate its investments in one or more industry sectors. The Fund is currently substantially invested in the Consumer Discretionary and Health Care sectors and its performance is therefore tied closely to, and affected by, developments in these industries.

Master Limited Partnerships (MLPs) and MLP investments have unique characteristics. A Fund does not receive the same tax benefits as a direct investment in an MLP.

The prices of MLP units may fluctuate abruptly and trading volume may be low, making it difficult for a Fund to sell its units at a favorable price. MLP general partners have the power to take actions that adversely affect the interests of unit holders. Most MLPs do not pay U.S. federal income tax at the partnership level, but an adverse change in tax laws could result in MLPs being treated as corporations for federal income tax purposes, which could reduce or eliminate distributions paid by MLPs to the Fund. If the Energy Transition Fund’s MLP investments exceed 25% of its assets, it may not qualify for treatment as a regulated investment company (“RIC”) under the Internal Revenue Code (“Code”), and the Fund would be taxed as an ordinary corporation, which could substantially reduce its net assets and its distributions to shareholders. The Midstream Fund is treated as a regular corporation, or “C” corporation, for U.S. federal income tax purposes, and therefore, is subject to U.S. federal income tax on its taxable income at the graduated rates applicable to corporations (currently a maximum rate of 21%) as well as state and local income taxes. The Midstream Fund will not benefit from current favorable federal income tax rates on long-term capital gains, and Fund income and losses will not be passed on to shareholders. The Midstream Fund accrues deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments. This deferred tax liability is reflected in the daily NAV, and as a result, the Fund’s after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Glossary of Terms contains definitions and additional information.

To view the top 10 holdings of a Fund, please click the Fund name: Cornerstone Growth, Focus, Cornerstone Mid Cap 30, Cornerstone Large Growth, Cornerstone Value, Total Return, Equity and Income, Balanced, Energy Transition, Midstream, Gas Utility, Japan, Japan Small Cap, Large Cap Financial, Small Cap Financial, Technology. Fund holdings are subject to change and not recommendations to buy or sell any security.

Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice.

News and Media Page:

To view the Morningstar ratings for the Japan Fund, please click here. (Media - TD Ameritrade)

To view the Morningstar ratings for the Focus Fund, please click here. (Media - CNBC-B. Macualey).

1 USD = 105.36 Yen as of 07/27/2020 (Media - Ticker - M. Takeda)

Tom White is a TD Ameritrade Network contributor and is not affiliated with the Hennessy Funds. Content is not investment advice, or a recommendation of any security, strategy, or account type. Options involve risks and are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses.(Media - TD Ameritrade-Rothberg)

To view the Morningstar ratings, please click here.

The Hennessy Funds are offered only to United States residents, and information on this web site is intended only for such persons. Nothing on this web site should be considered a solicitation to buy or an offer to sell shares of any Hennessy Fund in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction.

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