Mid-Caps at 16 Times Earnings Offer the Real Bargain: Hennessy's Wein

The S&P 500 trades at about 21 times earnings, but the average stock in the index sits at roughly 17 times — and mid-caps change hands at 16 to 16.5 times. That gap is the core of Josh Wein's pitch. The portfolio manager of the Hennessy Cornerstone Growth Fund argues the headline valuation problem is a mega-cap problem, and investors who think the whole market is too expensive are looking at the wrong numbers.

"The market is definitely paying for the liquidity that comes with these big names like Nvidia and Microsoft," Wein said. "But the average S&P stock is at about 17 times earnings. So, a lot more palatable to most investors."

At 16 to 16.5 times earnings, mid-caps deliver roughly a 6% earnings yield — a fair premium over the 10-year Treasury, which sits just below 5%, Wein said. "Certainly not a dizzying valuation multiple."

Earnings, not the Fed, are driving the tape

Markets are moving past their fixation on the Federal Reserve, according to Wein. He points to second-quarter results: S&P 500 companies posted revenue growth of more than 15%, in an economy growing at low single digits. That, he said, explains why stocks keep climbing despite higher oil prices, a 10-year yield near 5%, and a fresh Fed rate hike.

"I think that the market has moved away from focusing on the Fed as much as they used to," Wein said.

How high would yields have to go to break the growth story? Wein puts the line at roughly 5.5% on the 10-year. "I don't see the growth story getting unwound," he said of that level. "Maybe above that, then who knows, anything could happen." The market is currently pricing in one more hike this year and one to two more in 2024 — a path Wein does not consider dangerous territory.

Industrials lead the fund

Industrials are the biggest weight in the Hennessy Cornerstone Growth Fund, at nearly a quarter of assets and a meaningful overweight to the index. Within that, Wein favors construction and engineering names tied to onshoring, infrastructure spending, and the buildout of AI data centers.

His first pick: Tutor Perini (TPC), a traditional infrastructure builder working on mass transit, bridges, tunnels, hospitals, and shopping malls. The stock is up almost 30% year to date, but Wein does not think the opportunity is priced in. "This is not a tactical type of a thing. This is very much strategic," he said. "These are long-lived projects that take many years to build out... I think there can certainly be more to that over the next several years."

His second: Centuri Holdings (CTRI), down more than 20% year to date. Centuri sits at the convergence of infrastructure and the energy transition, providing utility infrastructure services and retrofitting for natural gas transmission — capacity that increasingly powers data centers. Wein attributes the stock's weakness to its energy component and volatility in the energy space. "I think that those two names have a long runway," he said. "It doesn't matter who's the winner in AI, which large language model, which chip company... what matters is that these companies have a long runway, a large backlog of business."

A rules-based process, not stock-picking

The fund screens on three criteria — valuation, earnings growth, and stock price momentum — and feeds roughly 50 names into the portfolio. Wein is careful to frame the holdings as outputs of a quantitative process rather than deep-dive calls. The fund even holds controversial names like Peloton and Macy's, companies that "have disappointed investors so many times and there's always a turnaround coming." The screen requires earnings improvement, not growth: a company can lose money and still qualify if it loses less the following year.

A few mega-caps appear on occasion — Walmart and ExxonMobil are current examples — and the fund also carries a meaningful energy allocation across refining and upstream and downstream operations. In technology, Wein avoids software and chips but owns equipment-based names like Diebold Nixdorf, which makes ATMs and point-of-sale systems.

The bullish case and its limits

Wein expects the S&P 500, up 13% year to date, to add another 5 to 10% by year-end. His math: on an equal-weight basis, if earnings keep advancing, the 17 times multiple compresses toward 16 or 15, pushing the earnings yield toward 7%. Against a 10-year yield near 5%, "that spread, that 7 versus 5, I think that's incredibly compelling historically." He also notes the rally has held up despite real competition for capital — a contrast with the near-zero-rate era when "there was really no alternative but to be in the market."

The biggest risk to his outlook is oil. "At probably any level above where we are for a prolonged period of time... it just makes its way through the economy," he said. He calls oil near $100 a real risk, expects it to break above $100 before falling below $80, and would start raising cash if the Fed hiked by 50 basis points at its next meeting. A meaningful expansion in kinetic warfare in the Middle East is the one thing that would change his market view.

His bottom line for investors who think stocks are too expensive: "I think they're wrong if... it comes down to time frame." Buying mega-cap tech with a horizon under a year is a mistake, he said. "What makes a lot more sense is to diversify or start that exposure more on the mid-cap side. I think there's a lot less has to go right for that to work."