Transcript:
Caroline Woods:
Joining us to kick off the week. The last full week of the third quarter is Josh wine. He’s portfolio manager of the Hennessey Cornerstone Growth Fund. Josh, so good to have you.
Josh Wein:
Good to be here. Thanks, Caroline.
Caroline Woods:
So stocks are coming off a choppy week but we’re seeing green arrows across the board right now. Despite the fact that oil is still higher the ten year yield sitting just below 5%. And of course the fed just hiked interest rates last week. Tell us what’s driving markets higher today.
Josh Wein:
I think it’s I think it’s actually a continuation of what we saw with Q2 earnings reports. So I think that the market has moved away from focusing on the fed as much as they used to. And I think that what we saw in the second quarter was about 15% plus revenue growth for the S&P 500. So, I mean, in an economy that’s growing at, you know, low single digits, I think that that speaks volumes about what keeps investors engaged despite some challenging headlines around oil and interest rates.
Caroline Woods:
Should the market be focusing on earnings though, rather than the fed? And is there a level on the ten year yield that would change your mind about that?
Josh Wein:
Yeah, I think I think given this kind of new paradigm shift with AI and and, you know, even infrastructure spending, which we’ll talk about in a little, a little later perhaps, but I think it’s warranted. I think that, you know, the ten, ten years are about 5%, give or take. I think that, you know, if it went to five and a half, I don’t see the growth story getting unwound.
Josh Wein:
You know, maybe above that, you know, then who knows, anything could happen. But I don’t think the market’s really looking for that. You know, we’re looking for a rate hike this year. That’s what the market is pricing in. And then maybe 1 to 2 more next year. I don’t think that gets us into dangerous territory where people start to second guess.
Caroline Woods:
Does the Fed’s rate hike last week change what you want to own? And if the fed cuts again, how does that change things. Or I’m sorry if the fed hikes again how does that change things.
Josh Wein:
Yeah I mean I well certainly you know just you know fundamentally I don’t think it changes much at all. I think that, you know what what we like as investors at Hennessey, funds, you know, doesn’t change. You know, our process is very disciplined and doesn’t react to, you know, fed rate hikes or even rate cuts. So, no, that doesn’t change.
Josh Wein:
And I don’t think it really should change for investors at large. I don’t think that, you know, 25 basis points here or there is a meaningful way to, you know, make big decisions about a portfolio at all.
Caroline Woods:
So let’s talk about what you like.
Josh Wein:
Sure. Yeah. Well, in our Hennessey Cornerstone Growth Fund, you know, right now, our biggest weight and a meaningful overweight to the index is industrials. So almost a quarter of the fund is in industrial names and more specifically things like construction and engineering. So kind of taking advantage of of some of these big themes around the on shoring and manufacturing, the build out of infrastructure and the improvement of infrastructure as well as, you know, of course, the build out of AI data centers and the like.
Caroline Woods:
Can you give us some construction and engineering names that you actually like?
Josh Wein:
Yeah, sure. Yeah. So one thing that I think, you know, none of these names are household names that are kind of interesting, you know, Tudor Perini. So it’s your traditional infrastructure name they’re building, you know, mass transit and bridges and tunnels, things like hospitals and shopping malls. But, you know, I think it’s an attractive valuation. You know, in the Hennessey Cornerstone Growth Fund, we’re looking at, you know, three legs of the stool of we’re looking at valuation earnings growth and stock price momentum.
Josh Wein:
So what comes to us are 50 names. And one of them is Peter Perini. Another name that is certainly not a household name at all is Sentry Holdings. And I think what’s interesting about that is it’s kind of the convergence of infrastructure and also this energy transition and build out that, you know, in large part is because of AI.
Josh Wein:
So they are, you know, doing utility infrastructure services, retrofitting, to allow for natural gas transmission, which is increasingly powering these data centers. So I think that those two names, you have a long runway, you know, it doesn’t matter who’s the winner in AI, which large language model, in which company, you know, that is in the background? I think what matters is that these companies, you know, are have a long runway, a long, you know, a large backlog of business.
Josh Wein:
And, it will be going on for many years.
Caroline Woods:
Okay. So that’s TPC and Katari. Both are higher today. But let’s break it down a little bit more because if I take a look, TPC is up almost 30% year to date. So the opportunity isn’t already priced in at these levels.
Josh Wein:
I don’t think so. I think that when these stocks start to move, you know, it’s it’s easy to get fearful that, oh, I missed the bottom and I missed the opportunity. I think these opportunities they are not you know this is not a tactical type of a thing. This is very much strategic. You know, these are long live projects that take many years to build out.
Josh Wein:
And and I don’t think that, you know, 30% is a great move. I think, you know, there can certainly be more to that, you know, over the next several years.
Caroline Woods:
Okay. And then Centuria is the opposite set up. It’s down more than 20% year to date. So what’s the market getting wrong there and when will it get it right.
Josh Wein:
Yeah. Well yeah I mean you know when these names go into the portfolio we’re looking at at prior stock momentum. And then you know, who knows what happens subsequent to that. I think the market you know, there is more of an energy component to Santori. And so, you know, I would chalk that up to the volatility in the energy space and, and maybe rubbing off on a name like, like century.
Caroline Woods:
So you’re looking at mid caps here. And I was taking a look at your notes and you said the market might be expensive but stocks are not. So would you say that the headline valuation problem is really just a mega cap problem.
Josh Wein:
Yeah I think so. I mean certainly you know, the you know the S&P 500 trading at about 21 times earnings. And it’s you know a market cap weighted index. And you know the market is definitely paying for the liquidity that comes with these big names like Nvidia and Microsoft. But the average S&P stock is at about 17 times earnings.
Josh Wein:
So a lot more palatable to most investors that are maybe their gut check is looking at, you know, something below 20 times. But mid caps are a little bit below the average S&P stock at about 16 16.5 times earnings. So you know, given where we are with interest rates I think that you know it’s about a 6% earnings yield.
Josh Wein:
I think that’s a fair you know, return above what you know, you can earn on a on a ten year, and certainly not a dizzying, you know, valuation multiple.
Caroline Woods:
What’s the strategy though? Does that mean that you would take money out of some of the mega cap winners and put it into mid caps, or would you just put new money into mid caps.
Josh Wein:
Yeah. I mean we don’t you know we don’t look at things within that kind of framework. I would say that, you know, over time you know more and more people are indexed to the S&P 500. I think that it ends up becoming a momentum, you know, an inherent momentum bet. You know, you’re putting more and more into the larger and larger names.
Josh Wein:
And it kind of feeds on itself. And I do think things like mid caps make a lot of sense, especially here, just in terms of diversification. I think that people are likely under allocated to mid cap. So we look at it as a diverse fire and certainly an opportunity ultimately.
Caroline Woods:
What else do you like in the mid-cap space outside of industrials?
Josh Wein:
Well I mean I think that, you know, information technology you know, is certainly a component of the growth fund. You know, we are not looking at things like software and ships, but you know, names like Diebold Nixdorf, which does, you know, ATM, machines and point of sale software, things like that. But more kind of equipment based, you know, technology.
Josh Wein:
I think that’s interesting. You know, just largely, you know, you know, we have a meaningful allocation to, to energy, more on kind of the diversified, you know, side with, you know, refining and, you know, both, you know, upstream and downstream. But yeah, I think that, you know, industrials is ultimately the largest component. And I think that of that a lot of it is construction and engineering and neurologic, you know, great things that come from, you know, our, our work that we do, kind of the rules based methodology that we use.
Caroline Woods:
Are there areas outside of mid-cap that still look relatively fairly valued or cheap in the current market?
Josh Wein:
Well, yeah. I mean, I think that I will say that there, you know, their names that I constantly think, you know, ten, 15 years ago would certainly have a much higher multiple. So I think that I think it’s really to take that kind of to flip it around a little bit. I think it’s anything that’s not large cap tech deserves a second look.
Josh Wein:
You know, you know, consumer discretionary and staples that you know I think people are concerned about, you know, the economy in the sense that it’s, you know, a k shaped kind of not and evenly spread out opportunities that for the consumer. And you know, what does that mean for consumer. I think that that could be overdone to some degree.
Josh Wein:
I think the wealth effect from the market’s marching higher this year. It’s, you know, should outweigh some of those concerns. So I think just broadly, you know, things like consumer, anything consumer facing I think deserves a us.
Caroline Woods:
So you are are bullish on the consumer and on the economy right now I am.
Josh Wein:
Yes.
Caroline Woods:
Okay. Can you give us any particular opportunities within that space. Because we’ve seen some pretty big winners that are, you know, consumer names but also some pretty big losers right.
Josh Wein:
Oh no. Definitely. Yeah. And you know, you know, we own you know, peloton which is certainly, you know volatile. And it depending on the day will tell you whether it’s going to win or lose or but you know things like peloton I think are interesting and you know you know Macy’s and names like that that are in some ways controversial because they’ve, I think disappointed investors so many times.
Josh Wein:
And there’s always a turnaround coming. You know, we are not with our methodology. We’re not getting in the weeds on names. You know, we we impart our rules. And what comes to us are our 50 names ultimately. So, you know, I think that in the aggregate, some of these themes are interesting. To zero in on any one name is always a little tricky because we’re not, you know, necessarily making a judgment on that name.
Josh Wein:
It’s more of a, I guess you could call it a quantitative process.
Caroline Woods:
So, what would make you stay or maybe the algorithm stay away from mid caps? What would need to happen for mid caps to look less attractive.
Josh Wein:
Sure. Well yeah I mean it’s it’s largely a mid-cap focus. Fine. I mean it’s it’s technically an all cap fund, but I think that, you know, it really comes down to stock price momentum. You know, we’re looking at names in the growth fund that are above 100, 175 million in market cap. So you know there are some small cap.
Josh Wein:
There’s certainly some mega cap names on occasion. But you know, it really just comes down to, you know, earnings improvement. And and in stock price momentum I think there will always be some a good number of names that meet our valuation criteria. But I think it really comes down to you, you know, the market performance, you know, and, you know, on the earnings momentum side or on the earnings improvement side, we’re really looking at improving it.
Josh Wein:
So it’s not even growth. So I think that’s important. We’re looking at you know there could be a name that has lost money and then loses less money the following year. So you know we are kind of looking at names that ultimately are in turnaround mode to some degree. It’s not a, you know, 10 or 20% earnings growth story that we need.
Josh Wein:
We just need to see that the company is turning around and that the market is confirming that there’s something to that. And, you know, we.
Caroline Woods:
Are there at.
Josh Wein:
The moment.
Caroline Woods:
Are there any mega cap names in your portfolio right now?
Josh Wein:
We do in in the area of energy, I believe we, you know, name like Walmart, you know, is in the portfolio. So yeah, we do have, you know, you know, anywhere from, you know, a couple to a few names at any given time. It’s typically a name like Walmart, you know, large cap energy names like an ExxonMobil can appear in the portfolio, just given even the history of of how this source’s names.
Josh Wein:
So yeah.
Caroline Woods:
So overall this is a market that you think is heading higher from here I do.
Josh Wein:
Yeah I mean and we’ve had a great year and it it feels a little greedy to, to to wish or hope for more. But I think more is coming. I think that I do think that the fed is on the case. I think they can contain inflation. It’s certainly elevated.
Josh Wein:
From where they want it. It’s not saying, I think that this rate hike in probably 1 to 2 more will calm the market down as it relates to that. I think the wild card is certainly what’s going on in the Middle East with oil. It probably and we’ve seen hundred dollars barrel, I think we thought we’d see that a few months ago.
Josh Wein:
So it’s taken a while for that to really work its way through. But, you know, I don’t know if that’s good or bad news, but I think that that’s the only thing that’s so hard to predict. I don’t think anyone thought we’d still be here. You know, with the Strait of Hormuz and the price of oil. But, but other than that, in the markets dealing with that point.
Josh Wein:
Well, I think that I, you know, I think that the earnings growth and story with some of these themes that we’ve talked about are really compelling.
Caroline Woods:
So what would you say is the biggest risk to your bullish case. Is it oil. At what level?
Josh Wein:
Yeah I think it’s oil. You know, at probably any level above where we are for a long period of time. Yeah, I think that that just, you know, makes its way through the economy, you know, shipping and the price of components and, you know, you name it everything. So, yeah, I think, I think right now my sense is that the market is not terribly scared of where we are with oil.
Josh Wein:
But, you know, there have been signs of it. And certainly people think about what they pay for gas, whether or whether it’s, you know, adjusting for inflation, probably not as expensive as we would have thought it would be if we had, you know, 20 years ago, predicted where we might be. But in any event, I think that I think that that’s really what it comes down to is just, you know, confidence and sentiment.
Josh Wein:
And that comes down to things like energy prices.
Caroline Woods:
Okay. So how much higher do you think we’re going S&P 500 by the end of 13% year to date.
Josh Wein:
Yeah I think by the end of the year we could have another 5 to 10% add it on to the market.
Caroline Woods:
Wow. Thanks to it just industrials or thanks to. No I think I think.
Josh Wein:
It’s yeah I think it’s you know if we’re looking at you know I, I really do prefer to look at the, at the market kind of on an equal weight basis. That’s how investors invest is kind of looking at things relatively equal weight as opposed to market cap weight. So if we’re at 17 times earnings, you know, if if earnings are continuing to advance, you know, at a at a decent clip, which I think is reasonable to assume for at least the next quarter or so, you know, that 17 multiple becomes, you know, maybe 16 or 15.
Josh Wein:
And then all of the sudden we’re looking at kind of an earnings yield, if you will, that starts to approach 7%. And I think, you know, with rates kind of holding in here, you know, just below 5%, I think that that net spread at seven versus five, I think that’s incredibly compelling historically. I think that, you know, I think that that kind of will get people interested.
Josh Wein:
You know, I’d also point out that, you know, there’s a lot of competition for capital right now. And I think that speaks a lot to the quality of this rally. So there’s a lot of places that people can put their money now versus, you know, 4 or 5 years ago when rates were were near zero and there was really no alternative but to be in the market.
Josh Wein:
Now, there are some choices. And the fact that the market has held up so well, I think speaks volumes about, again, earnings growth and the economy and the resiliency of the job market. We always want it to be better, but it’s incredibly strong.
Caroline Woods:
So okay. So bottom line, Josh, if investors think the market thinks stocks are too expensive to buy right now, particularly the S&P 500, are they wrong?
Josh Wein:
I think they’re I think they’re wrong if they’re I mean I think it comes down to a time frame. So if if you’re looking to buy large cap stocks because you like the excitement around them and you like the exposure to tech, I think you’re wrong to get into that. If your time frame is less than a year, I think if it’s well beyond a year, then I think that makes some sense.
Josh Wein:
But I think throughout I think what makes a lot more sense is to diversify or start that exposure more on the midcap side. I think there’s okay, a lot less has to go right for that to work.
Caroline Woods:
All right. I think this is a great time to pivot for a rapid fire round of this or that your first time playing. So the rules are quick questions, quick answers. No hedging if you can help it. You ready?
Josh Wein:
Yes.
Caroline Woods:
Here we go. Seasonal weakness over or more pain ahead.
Caroline Woods:
Over portfolio allocation. Fully invested or keep some dry powder.
Josh Wein:
Will always fully does.
Caroline Woods:
Stock picking your index funds.
Josh Wein:
Stock picking.
Caroline Woods:
Tech into your end leads or lags?
Caroline Woods:
Leads Mega cap tech overpriced or still worth it?
Josh Wein:
Overpriced.
Caroline Woods:
Mega caps or mid caps if you can only pick one mid cap.
Caroline Woods:
Oil near 100. Real risk or just noise.
Josh Wein:
Real risk.
Caroline Woods:
What comes first? Oil back below 80 or above 100.
Josh Wein:
Above 100.
Caroline Woods:
Higher interest rates. Big threat to stocks are already priced in.
Josh Wein:
Already priced in.
Caroline Woods:
Bond yields at 5%. Buying opportunity or threat to equities.
Josh Wein:
See buying up okay.
Caroline Woods:
Next fed move, hike or hold.
Josh Wein:
Let’s say hold the good question.
Caroline Woods:
Economy from here accelerating or slowing.
Josh Wein:
I’m going to say slowing. That’s so tricky.
Caroline Woods:
But you would still bet on the consumer. Yes or no I.
Josh Wein:
Would I would I think the pricing so strong that when I think slowing it’s more I’m hedging but not oh.
Caroline Woods:
One sector you wouldn’t touch here.
Josh Wein:
Your technology.
Caroline Woods:
One stock you’d put fresh money into today.
Josh Wein:
I think Century Holdings.
Caroline Woods:
One tech stock you would buy today.
Josh Wein:
Diebold.
Caroline Woods:
Finish this sentence. I’d start raising cash if.
Josh Wein:
If the fed raised by 50 basis points at the next meeting.
Caroline Woods:
And finally finish the sentence, the one thing that would change my market outlook is.
Josh Wein:
In a meaningful expansion in in genetic warfare overseas in the Middle East.
Caroline Woods:
All right. Josh wine portfolio manager of the Hennessy Cornerstone Growth Fund, thank you so much for playing along and for giving us quick answers. We really appreciate your insights and picks as well.
Josh Wein:
Okay.
Caroline Woods:
Thank you. If you enjoyed this street talk, check out our full interview with David Wagner. He has some other ideas about where to invest fresh capital. Check it out.
