A winning strategy
Interview: Hennesey Funds---Neil Hennessy---President/Fund Manager
>> the scene inside the washington state convention% -center. you’re looking at the new c.e.o. of boeing speaking to thousands of jubilant employees there after the company has confirmed it is indeed going ahead with the long-awaited launch of its 7e7 dreamliner. this is the company’s first all new airplane that it’s developed in 13 years. the last one being the triple 7, the 777. the company has chosen everett, washington, as the final assembly site and boeing says three models of the 7e7 are in development and will be offered to airlines. the decision to build the so-called 7e7 follows months of speculation and meetings with suppliers and customers including tight-lipped discussions on sunday and monday about the board of directors. analysts say the new project is notable for several reasons, not the least of which is the fact that boeing has fallen behind rival airbus in deliveries this year, the first ever for those two companies. it would also mark a commitment to commercial aviation and serve as a positive close to a difficult year that’s seen the company temporarily banned from bidding on pentagon contracts and also forced resignations of the former chairman and c.e.o., phil condit, as well as the c.f.o., and of course we are live on the scene in seattle should there be any other further developments. but there it is, confirmation of what we had expected. our next guest says corporate earnings will continue to improve and that will drive stocks higher as we head into 2004. he manages the hennesey cornerstone growth fund which is up about 45% this year, double the s&p 500. neil hennessy of the hennesey funds joins us from san fran to share his views of the markets and highlight what has led to a winning strategy this year. may i first digress, your thoughts of the boeing confirmation of the dreamliner project, the 7e7?
>> with the problems they’ve had in the last six months, it’s excellent for the company overall to be able to come out with a new model after 13 years and i think it’s going to be very good, obviously, for the company t going forward.
>> is boeing the kind of a company now that you would look at because of this confirmation or is this the worst kept secret in town as many people saw this, would it be a buying opportunity? this confirmation?
>> for us, no, matt. our funds are managed in a highly disciplined and non-emotional manner and in fact we use a formula so would boeing come into our funds? if it met the different criteria of the funds we manage.
>> now we’ll go to our funds. you have a disciplined, non-emotional investment strategy. you told my producers. maybe you could elaborate on that a bit.
>> in our growth fund, we screen approximately 9,700 different companies and the first screen is to make sure they have a market capitalization and last year was $134 million. the second screen is to make sure that the price to sales ratio is 1.5 or less so we’re not going to pay more than $1.50 per $1 in sales and we want the company to have higher earnings than the previous year and then we buy and select the 50 companies with the best relative strength over three, six, and 12-month periods and we hold those stocks for approximately a year and then refresh the portfolios to that exact same criteria.
>> there are certain things you can’t control that aren’t that simple and that is the relative or overall performance of the markets and you have said that you expect an 11% return on stocks for the next couple of years. 11% seems like an orbtrary number and also a confident forecast.
>> essentially, everything we do is we look at history. if you go back and look at world war ii, korean war to vietnam conflict, gulf i and gulf ii, as they call it, they have similarities, in other words, the market retreats 15% going into a conflict then finishes in positive territory and then grows approximately 11% a year until the next conflict. and if you look at gulf ii, when a year ago in december we started to amass troops for iraq, the market retreated 15% on its nose till march 11 of this year and came all the way back and as we end the year and hopefully the conflict, you’ll see that it continues to grow at at approximately avenue lrs, which -- grow at approximately 11%, which is way down from 16% since 1983 forward so we’re looking at a conservative number.
>> we’re under a minute here, now. you mentioned that you see this as an ideal environment for stocks . ideal?
>> if i told you a year ago, matt, that we’d have low inflation, low interest rates, corporate earnings higher, corporations spending money, that investor confidence was coming back, that the bush tax plan that 85% of dividends are tax-free, plus the arrests of saddam hussein, most people would say i’d be crazy but that would be a bull market and that’s exactly what i think we’re in.
>> they say never stand in front of a red hot bull and that is one, folks, his name is neil hennessy, president and fund manager of the hennesey funds, running the hennesey cornerstone growth fund, up 44% year to date. the bank of japan says it’s more optimistic about japan’s economy. coming up, we’ll have details on the b.o.j.
