Sally Beauty Holdings (Name TO BE Changed From Sally Holdings, Inc.) (NYSE:SBH)
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5 Years : From Apr 2012 to Apr 2017
Brian Peery's Hennessy Focus 30 (HFTFX) fund utilizes a quantitative strategy that avoids the flavor of the month and instead picks longer-term investments that can succeed in any market environment.
Peery, co-portfolio manager, said the fund employs a rigorous stock-selection process that starts with a database of 10,000 public companies and then pulls from those with a market capitalization between $1 billion and $10 billion. Hennessy then looks at the annual earnings of the mid-cap companies to make sure growth is transferring down to the bottom line and to shareholders, and weighs the stock's recent performance.
The fund then takes the top 30 out-of-favor U.S.-listed stocks, which eliminates exposure to international markets--unless those firms sell products abroad--and places an equal 3.3% weight on each stock.
Peery said Hennessy typically holds stocks for approximately a year. The fund last rebalanced the portfolio in the fall and as the year progresses, Hennessy will buy more into the winners and pull from the losers.
According to Peery, the strategy of holding 30 stocks gives Hennessy Focus enough diversification to minimize risk, but also gives the fund an opportunity to hopefully outperform the market because it is concentrated in only 30 names.
The market has recently shown that strategy can be successful if even one stock does well. For example, Caterpillar Inc.'s (CAT) 20% stock climb in January contributed nearly 34% of the Dow Jones Industrial Average's 415-point advance that month.
Peery said one stock Hennessy has held for a few years is discount retailer Family Dollar Stores Inc. (FDO), which he said participates in a low-end retailing category that performed really well in 2008 and 2009. Other Hennessy holdings in that space include Ross Stores Inc. (ROST) and Sally Beauty Holdings Inc. (SBH).
Peery's portfolio is also heavily weighted to utilities--which make up roughly 30% of the holdings. While he concedes utilities are a bit boring, Peery says they are a steady investment as those firms have predictable revenue streams.
"With the utilities, they never go down in price," Peery said, referring to the rates utilities charge consumers. "It's got nice, steady margins and will continue to grow over the long term."
Roughly 84% of the portfolio's picks currently pay a dividend, and Peery said it has been an interesting shift to see more mid-cap companies court investors through a combined focus on growth and a payout stream.
"It's not necessarily something we are looking for in the portfolio, but it's giving you a little more income and hopefully a little less volatility," said Peery.
Lipper Inc. researcher Tom Roseen said while the fund might not be for the faint of heart, "if you are looking for a fund that is growth focused and has a strict discipline to how they select their stocks, this might be a fund to look at."
Roseen described the fund's strategy as a model that looks for a stock that has fallen out of favor but still had signs of growth showing up in the firms' income statements from the prior year.
The fund--which was founded in September 2003 and has roughly $146.2 million in assets--has outperformed its category mid-cap blend index four of the past five years and is 3.05 percentage points over the benchmark over the past year as of Wednesday, according to Morningstar. Over a three-year period, returns are up 22% and just a sliver under the category.
Its largest holdings are in utilities, consumer discretionary and energy companies.
-By John Kell, Dow Jones Newswires; 212-416-2480; firstname.lastname@example.org
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