Midcaps Shine: Stocks Cheap Despite Market Hype

Josh Wein, portfolio manager of the Hennessy Cornerstone Growth Fund, suggests that investors concerned about high stock valuations should look beyond mega-cap tech. He notes that while the S&P 500 trades at 21 times earnings, the average S&P stock is closer to 17 times, with mid-caps even lower at approximately 16.5 times earnings. This presents a compelling earnings yield compared to current interest rates.

Wein's fund has a significant allocation to industrial companies, particularly in construction and engineering. These sectors are seen as beneficiaries of major themes such as onshoring, infrastructure improvements, and the buildout of AI data centers. Specific holdings mentioned include Tudor Perini and Centauri Holdings, both recognized for their long-term project backlogs.

The biggest risk to the current bullish market sentiment, according to Wein, is the volatility in oil prices. While the market has largely absorbed current energy costs, a prolonged period of significantly higher oil prices could impact the broader economy through increased shipping and component costs. Despite this risk, Wein anticipates further market gains by the end of the year.

Wein advocates for a strategic focus on mid-cap stocks, viewing them as a diversifier and an opportunity due to their less frothy valuations. He believes that less needs to go right for mid-caps to perform well compared to larger, more expensive market segments. The fund also explores opportunities in areas like equipment-based technology and diversified energy. Consumer-facing sectors also warrant a second look, as the wealth effect from market gains may outweigh economic concerns.