Cornerstone Mid-Cap 30 Fund Strategy

Portfolio Managers, Ryan Kelley and Josh Wein detail how the Hennessy Cornerstone Mid Cap 30 Fund utilizes a quantitative formula to select a concentrated portfolio of 30 domestic, mid-cap stocks.

November 2019

  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Co-Portfolio Manager
 

Ryan Kelley:  In the Hennessy Cornerstone Mid Cap 30 Fund, we're looking for a concentrated portfolio of 30 companies, domestic stocks that marry both value and momentum and we're looking for growth at a reasonable price. We use a quantitative formula to select these stocks, and we do that because we want our investors to have transparency, and it's very repeatable. That's how we've been running the Fund really for the last 15 years since its inception.

 

Investment Criteria

 

Ryan Kelley:  We start with a universe of about 10,000 companies and we want to whittle that down to just 30 that the Fund owns. We're looking for domestic-only companies. We're looking for companies in the market cap range between 1 billion and 10 billion, because we really want this fund to be a mid cap fund for our investors. We want companies that are trading less than one and a half times price to sales because we don't want to pay more than $1.50 for every $1 in revenue. 

 

 We're looking for companies that have earnings growth over the past year, and companies that have three- and six- month price momentum. So, they've seen their stock prices appreciate over the past three and six months. We then take that group of companies and we look for the ones that have the best 12-month price performance, and those 30 best stocks are the ones that we buy in the Fund.

 

Price to Sales

 

Josh Wein:  We use price to sales as our primary valuation metric for a couple of reasons. First, it's a little bit harder to manipulate sales than it is earnings. Earnings are subject to several adjustments and assumptions that could be made by management. More importantly, though, we use price to sales as we feel it captures companies that may have recently returned to profitability or companies that might have temporarily depressed levels of earnings. Traditional valuation metrics would overlook these companies, and we feel that it's important to have a metric that encompasses a larger opportunity set.

 

Josh Wein:  The final step in our investment process is stock price momentum. We feel that stock price momentum is a proxy for investor sentiment. Investor sentiment is important as we feel that it is a way for us to see if the investment community has taken notice of the improving fundamentals in the companies that we're considering.