Portfolio Drivers: Consumer Discretionary and Industrials

Cornerstone Mid Cap 30 Fund Portfolio Managers Ryan Kelley and Josh Wein review the Fund’s investment strategy, discuss the most recent rebalance, and highlight fundamental drivers of the portfolio.

November 2024
  • Neil J. Hennessy
    Neil J. Hennessy
    Chief Market Strategist and Portfolio Manager
  • Ryan C. Kelley
    Ryan C. Kelley, CFA
    Chief Investment Officer and Portfolio Manager
  • L. Joshua Wein, CAIA
    L. Joshua Wein, CAIA
    Portfolio Manager

Key Takeaways

»    The strategy seeks 30 mid-cap stocks between $1 and $10 billion in market capitalization with value and momentum characteristics.
»    Following its most recent rebalance, the portfolio is diversified across 10 of 11 sectors; its largest weighting is in Consumer Discretionary.
»    Drivers of performance over this next year could be the overall growth of the economy, the health of the consumer, and the strength of housing and housing-related stocks.
»    The Fund’s median price-to-sales ratio is 0.9x as of November 15, 2024, half of the Russell Midcap® Index’s 1.8x.

What is the Fund’s investment strategy?

The Cornerstone Mid Cap 30 Fund utilizes a formula to select 30 domestic, mid-cap stocks with market capitalizations between $1 and $10 billion that exhibit both value and momentum characteristics. The formula selects stocks with higher year-over-year earnings, positive stock price appreciation, and lower price-to-sales ratios. The universe of mid-cap stocks is screened using these criteria, and the portfolio is rebalanced annually, generally in the fall. Each stock is weighted equally at approximately 3.3% of the portfolio at the onset of the rebalance, although stock price movements can cause relative weights to change over time.

Would you please discuss the composition of the Fund?

Following the most recent annual rebalance in the fall of 2024, the Fund’s holdings include stocks representing 10 of the 11 GICS® (Global Industry Classification Standard) sectors with the exception being Health Care. The largest sector exposure is Consumer Discretionary with ten holdings, and the second largest is Industrials with seven holdings. We retained two out of the 30 holdings from last year, which we refer to as “keepers:”  Cinemark Holdings, Inc. (CNK) and Fluor Corporation (FLR). Finally, while the Fund overall remains highly concentrated in 30 stocks, we note that this year’s portfolio is diversified across 22 different GICS sub-industries.

Compared to the Russell Midcap® Index, Consumer Discretionary is the most significantly overweight sector. We believe a robust job market, a healthy consumer, and strong wages should continue to drive spending, which in turn may drive higher growth in earnings and positive stock price performance for many of the Fund’s consumer-related holdings. Industrials is the second most overweight sector compared to the benchmark. We believe Industrials could continue to benefit from an improving economy, continued domestic investment in manufacturing, construction, energy, transportation infrastructure, and housing, and strong demand for consulting, air services, and equipment.

Are there common investment themes in the current portfolio?

With over half of the portfolio concentrated in the Consumer Discretionary and Industrials sectors, we believe that primary drivers of relative performance this year will include the overall growth of the economy as well as the health of the consumer. The potential for a declining interest rate environment bodes well for the U.S. consumer. Additionally, if inflation continues to moderate, this could lead to improved corporate profitability for many Industrial companies that have seen costs rise over the past few years. 

Another driver of performance, regardless of sector, is the strength of housing and housing-related stocks. Many of our portfolio companies benefit from a heathy real estate market, declining interest rates, and spending on household goods. Specifically, three out of the 30 holdings are homebuilders, one is a real estate services company, and one is related to housewares and home furnishings. With the potential of declining mortgage rates and increasing homeownership rates across certain demographic age groups in the U.S., we believe homebuilders could benefit greatly from lower home inventory as well as greater affordability.  

What is the median market capitalization of the Fund’s holdings following the most recent rebalance?

The Fund selects its holdings from a universe of stocks with market capitalizations ranging from $1 billion to $10 billion. As of November 15, 2024, the median market cap of the Fund was $5.5 billion, up from last year’s $3.5 billion at the end of the rebalance in 2023 and about half the median market cap of the Russell Midcap® Index. We believe small- to mid-cap stocks offer attractive returns as well as diversification compared to the larger stock universe.

Would you please discuss the relative valuation of the Fund’s holdings compared to the benchmark?

Attractive valuations are an important part of the Fund’s stock selection process. The Fund uses price-to-sales as its primary valuation metric because it can be universally applied and because it is harder for companies to manipulate sales compared to earnings. The Fund selects stocks with price-to-sales ratios below 1.5x. The median price-to-sales ratio of the portfolio is 0.9x as of November 15, 2024, compared to 1.8x for its benchmark index, the Russell Midcap® Index.

The Fund’s holdings are also trading at a discount in terms of price-to-earnings. The Fund’s median estimated forward price-to-earnings ratio is 12.6x as of November 15, 2024, versus 20.1x for its benchmark index.

 

Click here for a full listing of Holdings. 

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