STAMFORD, Conn. (TheStreet) -- Frank Ingarra, co-manager for the Hennessy Cornerstone Large Growth Fund (HFLGX) - Get Report, expects consumers to defy skeptics this holiday season and companies to boost technology spending next year.
The fund has risen 52% since it was introduced on March 20, while the
S&P 500 Index
has advanced 47%. Its top holdings include
Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.
Are you a bull or a bear?
We are bullish. Since hitting their lows in March, the major indices have rallied back over 60%. There is certainly some ground to make up for the markets to return to their pre-recession levels, but I believe we are in the midst of a recovery and that the markets have now made a move back to "normal," where growth is based on fundamentals.
What is your top stock pick?
One metric we utilize in selecting stocks in the Hennessy Cornerstone Large Growth Fund is the price-to-cash flow ratio. The model selects stocks trading at attractive prices relative to the cash they're generating. One company that falls into that category is the
. It's a company generating very strong free cash flow while trading at less than 10 times its cash flow, right in line with the median multiple for stocks in the retail space.
All things considered, the consumer has really shown a remarkable resiliency during this recession, and we think that will continue this holiday season. The company has really ramped up its marketing with a goal towards up-selling customers and increasing store traffic during the holiday season. We feel as though these efforts will bear fruit. The company is poised to complete a really strong fourth quarter.
What is your top "under-the-radar" stock pick?
Another metric we use in the Hennessy Cornerstone Large Growth Fund is return on total capital. One "beneath the radar" company with a very attractive return on total capital is
. The company has worked to ramp up production, optimize its refining capacity, and add to both its onshore and offshore leases. The company is generating a greater return on total capital than the median for stocks in the U.S. oil and gas industry. If increased exploration activity in 2010 yields successful drilling results, the potential for the stock to outperform its peers in this space is certainly there.
What is your favorite sector?
Information technology for a number of reasons. Enterprise spending on tech products is increasing as access to credit for large companies has improved. Lots of companies need to ramp up their tech spending after having cut back too much during the recession.
The sector also has a high degree of international exposure so the sector will see the benefit of the weaker dollar more so than others. Many of these technology stocks have passed our Hennessy Cornerstone Large Growth model as a result of their strong growth in terms of return on total capital and moderate valuation in terms of price to cash flow. One stock in the sector we like is Western Digital. It has a high return on capital, is extremely well-run, and is a way for investors to gain exposure to the Windows 7 upgrade in PCs in 2010.
What sector or stock would you avoid?
We believe that there is value in every sector, however, investors may want to adopt more of a wait and see approach with the health care sector as impending industry reform in Congress may ultimately crimp profits for these companies. Also, a number of profitable industry drugs are going off patent in the next few years.
In our model, the majority of health care stocks are not making the cut because of their lower returns on total capital and higher price-to-cash-flow ratios. While some stocks in the sector may do well, such as generic pharmaceutical manufacturers, there are many wild cards in this sector.
Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.