Do you think the stock market looks horrible? The market, in the form of the S&P 500, is down 12.74% over the past 12 months entering Thursday. But the managers of $296.7 million Hennessy Cornerstone Value Investor Fund (HFCVX) see good times ahead. "Personally, I think the economy is in very good shape," said co-manager Neil Hennessy.
Then again, bullishness is likely what you should expect from a manager whose fund is outperforming. The fund is in positive territory, up 2.44% over the past 12 months, and tops 95% of its large-cap value direct rivals tracked by Morningstar Direct.
Stock Market Impact
Is Hennessy worried about how inflation will impact the stock market? "Rates are up," Hennessy said. "But they're nothing like the 18% rate that existed when I bought my first house (in the early 1980s)."
Is unemployment weighing down the stock market? "Today, our biggest problem is getting people to work," he said. "Companies can't find enough workers."
Can businesses afford to spend money? "Companies are flush with cash," Hennessy said. "OK, earnings are down a little. Who cares? Earnings don't pay the bills. Companies in the S&P 500 have over $7 trillion in cash."
And can investors afford to buy stock? "Consumers have $18 trillion sitting in their checking and savings accounts," Hennessy said. "There's plenty of cash sitting on the sidelines, waiting to buy equities."
Further, is he worried a recession will strangle the stock market this year? "You can't have a deep recession with high employment," he said. "And you can't have a deep recession without a weak financial system, which we don't have now. In fact, financial institutions are extremely strong."
So where is the bull market? "You have to be patient," he said. "The market will be volatile. But strong-cash-flow companies will keep the market on a solid footing going forward. It will creep up little by little. Overall, it will be slow and steady, with volatility."
The Fund's Traits
One uncommon practice by the fund is that it reconstitutes its portfolio once a year. That is intended to help remove emotion from portfolio construction. The fund's most recent rebalance was last March.
What else goes into Hennessy Cornerstone Value Fund's approach to investing? Neil Hennessy and co-managers Ryan Kelley and Joshua Wein aim "to take emotion out of investing," Hennessy said. Instead, they use by-the-numbers quantitative analysis to search for stocks they want to buy.
One trait shared by their buys is above-average cash flows. That's a sign of strong financial fundamentals.
Strong Dividend Yield
Another shared trait is strong dividend yield.
One result is that the fund tends to offer shareholders a relatively smooth ride. Over the five years ended Dec. 31, the fund gained 86.26% as much as the S&P 500 during market advances. During pullbacks, the fund limited itself to 90.61% of losses by the broad stock market.
That's a picture of a fund well-suited for shareholders who are willing to sacrifice a bit of upside potential in the long run for the sake of less volatility and higher income along the way. "This fund is excellent for investors who want to sleep well at night," Kelley said. "They don't want to worry about the next highflying sector coming apart. And they get strong dividend yields."
Stocks That Fit This Fund
Hennessey Cornerstone Value algorithms targeted ADRs in French energy explorer and producer TotalEnergies for the portfolio about six years ago.
The energy stock's dividend yield is 3.7%. "When we purchased it, it was about 4%," Kelley said. "It has grown its dividend by 10.5% a year for three years. They pay a nice regular dividend. And they paid almost $1 per share of a special dividend a couple of months ago. There's a lot of cash flow. But a lot of extra capital is being given back to investors."
Despite a 25% average annual return over the past two years, the stock is still relatively inexpensive. Its price-earnings ratio is 6 on next year's earnings vs. about 16 for the broad stock market in the form of the S&P 500, Kelley says.
Underappreciated In The Stock Market
Money-center bank JPMorgan Chase sports a 3% dividend yield. Total return is negative 7.07% over the past 12 months. That reflects pressure on the bank's fixed-income trading and investment banking operations.
Yet Hennessy Cornerstone Value Fund has held the stock since February 2019. "Financials are in good shape," Kelley said. "But financials are underappreciated by most of the stock market. When you look at fundamentals, they've seen a 48% increase in net interest income in one year. . . Financials do better in a rising-rate environment."
That's because banks tend to pay less for deposits than they make on lending and investment banking.
Likable Tech Stock
Total return by Texas Instruments is negative 2.10% over the past 12 months. And the Hennessy Cornerstone Value Fund shuns tech-sector glamour stocks. Still, Texas Instruments is this fund's type of technology stock. "This is the kind of tech company that would get included in this fund, not the more volatile highflying tech companies that don't pay dividends," Kelley said.
Texas Instruments has a 2.9% dividend yield. "This company has significantly increased its dividend by 17% per year for the last five years," Kelley said. "It has gone through rough times." Over the past year, shares have traded in a range between about 145 and 200.
Yet over the past five years, the stock's average annual gain is 10.46%, vs. 8.93% for the broad stock market as represented by the S&P 500.
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