By Michael Brush, MarketWatch
Cheap momentum names to favor
Kelly doesn’t like to single out names among his group of 30, and I get the logic. Part of the point of putting 30 names in the portfolio is to stay diversified, and you never know in advance which of them will be the really big winners.
Here’s the full list:
|Holdings||Ticker||Percentage of net assets||Market cap, in billions of dollars||
|1-year price change||Sector|
|Aecom||ACM /zigman2/quotes/204198156/composite ACM||3.5%||6.7||0.3x||36%||Industrials|
|American Financial Group||AFG /zigman2/quotes/204294782/composite AFG||3.1%||9.7||1.2x||7%||Financials|
|Brighthouse Financial,||BHF /zigman2/quotes/205830158/composite BHF||3.2%||4.3||0.5x||4%||Financials|
|Crown Holdings||CCK /zigman2/quotes/202459264/composite CCK||3.7%||10.2||0.9x||56%||Materials|
|First American Financial||FAF /zigman2/quotes/210452372/composite FAF||3.3%||7.0||1.2x||35%||Financials|
|Hanover Insurance Group||THG /zigman2/quotes/204392149/composite THG||3.1%||5.3||1.2x||26%||Financials|
|Itron, Inc.||ITRI /zigman2/quotes/208442969/composite ITRI||3.4%||3.1||1.3x||53%||Information Technology|
|Jabil||JBL /zigman2/quotes/203847835/composite JBL||3.3%||5.9||0.2x||60%||Information Technology|
|KB Home||KBH /zigman2/quotes/206220859/composite KBH||3.4%||3.1||0.7x||70%||Consumer Discretionary|
|Landstar System||LSTR /zigman2/quotes/207418022/composite LSTR||3.2%||4.4||1.0x||6%||Industrials|
|Lithia Motors (Class A)||LAD /zigman2/quotes/202974783/composite LAD||3.9%||3.7||0.3x||97%||Consumer Discretionary|
|LPL Financial Holdings,||LPLA /zigman2/quotes/202092656/composite LPLA||3.4%||7.3||1.4x||49%||Financials|
|MasTec||MTZ /zigman2/quotes/207965492/composite MTZ||3.1%||5.0||0.7x||52%||Industrials|
|Meritage Homes||MTH /zigman2/quotes/209069331/composite MTH||3.2%||2.6||0.7x||77%||Consumer Discretionary|
|NCR||NCR /zigman2/quotes/203631053/composite NCR||3.1%||4.2||0.6x||30%||Information Technology|
|News Corp.||NWSA /zigman2/quotes/201755982/composite NWSA||3.1%||7.5||0.7x||0%||Communication Services|
|Old Republic International||ORI /zigman2/quotes/204736448/composite ORI||3.0%||6.8||1.0x||8%||Financials|
|Owens Corning||OC /zigman2/quotes/202113551/composite OC||3.2%||7.3||1.0x||33%||Industrials|
|Packaging Corp. of America||PKG /zigman2/quotes/207413697/composite PKG||3.4%||10.6||1.5x||16%||Materials|
|RH||RH /zigman2/quotes/200286355/composite RH||3.4%||3.7||1.5x||81%||Consumer Discretionary|
|Scientific Games||SGMS /zigman2/quotes/202731508/composite SGMS||3.9%||2.6||0.8x||62%||Consumer Discretionary|
|Skechers U.S.A.||SKX /zigman2/quotes/201784799/composite SKX||3.3%||6.2||1.2x||48%||Consumer Discretionary|
|SunPower||SPWR /zigman2/quotes/200243424/composite SPWR||2.7%||1.2||0.6x||16%||Information Technology|
|Synaptics||SYNA /zigman2/quotes/208827271/composite SYNA||3.4%||1.9||1.4x||59%||Information Technology|
|Syneos Health||SYNH /zigman2/quotes/207981284/composite SYNH||3.1%||5.4||1.2x||10%||Health Care|
|SYNNEX||SNX /zigman2/quotes/208755595/composite SNX||3.4%||6.2||0.3x||61%||Information Technology|
|Taylor Morrison Home||TMHC /zigman2/quotes/209743863/composite TMHC||3.1%||2.4||0.5x||38%||Consumer Discretionary|
|Toll Brothers||TOL /zigman2/quotes/201912487/composite TOL||3.1%||5.6||0.8x||22%||Consumer Discretionary|
|Whirlpool||WHR /zigman2/quotes/200296850/composite WHR||3.1%||9.0||0.4x||19%||Consumer Discretionary|
|Williams-Sonoma||WSM /zigman2/quotes/202067350/composite WSM||3.1%||5.1||0.9x||26%||Consumer Discretionary|
|Note: Holdings as of Oct. 31|
|Market data as of Nov. 22|
I suggest using his portfolio as a short list of names to research. (The fund rebalances once a year and it just did so on Oct. 18. So the names are fresh as a buy list.) And we can still learn a lot about how to position in the market now, based on what his screens are telling us.
Here are some key lessons:
• Own cyclicals. The big-picture takeaway is that it makes sense to overweight cyclical names, or those economically sensitive companies that do the best when economies are recovering or strong. As I wrote in a column favoring cyclicals in August ahead of their big move up, there’s been a lot of fear about global recession. It still has many investors shunning cyclicals.
But cyclicals still have room to do well because economic indicators around the globe are improving. This is no surprise given the amount of stimulus dumped on the global economy. Aside from increased government spending in many countries, the ratio of central banks cutting rates to those hiking rates has flipped to 5.7 this year from 0.5 last year, notes Mark Vaselkiv, the chief investment officer for fixed income at T. Rowe Price.
• Own tech. A lot of technology names have gotten attractive because of recession fears. So tech now represents 20% of the Hennessy Cornerstone Mid Cap 30 Fund, up from 0% two years ago and 10% last year. The Hennessy fund favors hardware, manufacturing and semiconductor equipment companies over software names.
This means names like Jabil /zigman2/quotes/203847835/composite JBL -2.25% in electronics manufacturing, NCR /zigman2/quotes/203631053/composite NCR -0.45% in retail payments systems and ATMs, SunPower /zigman2/quotes/200243424/composite SPWR -5.44% in solar energy equipment), Synaptics /zigman2/quotes/208827271/composite SYNA -0.11% in device screen technology and Synnex /zigman2/quotes/208755595/composite SNX -1.09% in storage and networking equipment.
“We think consumer spending will continue and that will be helpful to these companies,” says Kelly. Companies are also spending to upgrade their technology, and that will help, too.
• Own housing-related names. Warren Buffett’s Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A +0.51% /zigman2/quotes/200060694/composite BRK.B +0.15% recently confirmed this theme with the purchase of a big position in home good retailer RH /zigman2/quotes/200286355/composite RH -0.20% (previously known as Restoration Hardware), a name the Hennessy Cornerstone Mid Cap 30 Fund has held since last year. “RH is a turnaround story. A bricks-and-mortar chain surviving in the online world,” says Kelly.
Seven of the 10 consumer discretionary names in the portfolio are housing-related, including KB Home /zigman2/quotes/206220859/composite KBH +0.76% , Taylor Morrison Home /zigman2/quotes/209743863/composite TMHC +1.13% Toll Brothers /zigman2/quotes/201912487/composite TOL -1.10% , Whirlpool /zigman2/quotes/200296850/composite WHR +0.09% and Williams-Sonoma /zigman2/quotes/202067350/composite WSM +0.04% .
The housing sector benefits from several tailwinds including low mortgage rates, strong employment and wage growth, a continuing home building expansion, and rising home prices that support housing starts. Building permits, a leading indicator for housing starts, hit their highest level in over a decade in October.
And millennials are starting to buy houses more often. About 38% of them owned homes in the third quarter, up from 36% in the prior quarter. “That is still a far cry from the 65% ownership overall, but that just means there is a long way to go,” says Kelly.
• Own financials. Banks and insurance companies sold off when the yield curve flattened and briefly inverted last summer. But it looks like economic growth will stay on track, and this group benefits from solid economic strength which improves loan growth and investment returns. Two names in this group are actually stealth housing sector plays: Old Republic International /zigman2/quotes/204736448/composite ORI +0.38% and First American Financial /zigman2/quotes/210452372/composite FAF +0.24% . They offer title insurance and home mortgage guarantees.
“A lot of home-building and housing-related stocks permeate the portfolio,” says Kelly.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush is a Manhattan-based financial writer who publishes the stock newsletter Brush Up on Stocks.