A Numbers Guy Defies Emotion

Mutual Funds

A Numbers Guy Defies Emotion

Hennessy Focus buys cheap, growing companies, then dumps most of them in a year.

Neil Hennessy, who runs Hennessy Focus 30, takes the emotion out of investing. He doesn't meet with the top brass at the companies he invests in, and he rarely samples their wares.

So what has propelled Focus 30 to the top of the charts among funds that invest in midsize-company stocks with a blend of growth and value at-tributes? The answer is, a quantitative screening process from which Hennessy never deviates. "The market is extremely emotional, and investors often make the wrong decisions on that basis," he says. "But not me."

Focus 30 is one of six Hennessy stock funds, all mechanically managed. For Focus 30, Hennessy seeks to pinpoint midsize U.S. companies with rapid earnings growth that isn't yet reflected in their share prices. He only considers stocks with price-to-sales ratios of 1.5 or less.

He then makes sure that the latest annual earnings are higher than the previous year's. He also looks for companies with positive relative strength (a measure of how a stock performs compared with others) over the previous three to six months. Finally, he chooses the 30 stocks with the strong-est relative strength over the previous 12 months and buys an equal amount of each. Hennessy rebalances the portfolio once a year, generally bidding adieu to at least 90% of the holdings, mostly because they no longer meet his criteria. "We don't fall in love with the stocks, and that keeps us out of trouble," he says.