- In a down year for US stocks, Ryan Kelley’s mutual fund has beaten 96% of competitors.
- The fund co-manager believes a new bull market will likely take shape.
- Here are five dividend stocks to buy that Kelley’s model is bullish on now.
Most everyone on Wall Street, including top-performing portfolio manager Ryan Kelley, didn’t see this year’s massive stock market selloff coming. As it turns out, the S&P 500 was due to drop after rising by at least 18% for three straight years.
“It’s no surprise that, at some point, we were setting ourselves up for a big hit,” said Kelley, the chief investment officer at Hennessy Funds, in a recent interview with Insider.
Although a market meltdown wasn’t Kelley’s base case for 2022, the performance of his mutual fund would suggest he hasn’t been fazed by the downturn. The Hennessy Cornerstone Value Fund (HFCVX) is up 2.6% this year, while its index is down 6.3%, and it’s beaten 96% of peers this year, according to Morningstar.
Meanwhile, the S&P 500 is still down 13.2% this year, even after rising 12.9% since mid-June. The index is trading just below a key technical level of 4,231, according to LPL Financial, and pundits are split on whether the summer rally will continue or is destined to melt away.
Bet on a new bull market
Despite a slate of formidable risks — including shrinking GDP growth, quickly rising interest rates, persistently high inflation, and geopolitical tensions — that may lead to more wild market swings, Kelley believes investors should continue to stick with stocks.
“The next few years — longer term — we do think there’s going to be more volatility, but we think that overall, the market’s in good shape,” Kelley said. “That, in my opinion, shows that we’re in a period of a potential up market, and that would be, of course, a bull market.”
Stocks are unlikely to duplicate the outstanding returns that followed the financial crisis, Kelley said, but he thinks that there are still several catalysts for risk assets that bears are overlooking.
“Strong company balance sheets, lots of cash, buybacks, increasing dividends — those are all good for the market, even if economic growth is not as strong,” Kelley said.
The economy isn’t running nearly as hot as it was last year, but the mutual fund co-manager said it still appears to be “in very good shape.” Unemployment is near record lows, and many consumers have unspent stimulus money that they can use to weather price hikes, he said.
There are two other simple reasons why Kelley is constructive: first, the S&P 500 has shown resilience and could be trading far lower than it is now, given all the headwinds in markets; second, buying the dip has almost always paid off historically since stocks tend to rise over time.
“The declines that we have, they happen, they provide opportunities to buy, and this continued bull market — long-term bull market — seems to continue to play out,” Kelley said.
5 dividend stocks to buy now
Instead of hand-picking stocks to go in the Hennessy Cornerstone Value Fund, Kelley has built a model that does the selection for him. Insider profiled the fund’s quantitative strategy back in April, but in short the strategy targets companies that have relatively large market capitalizations, plenty of shares outstanding, high sales and cash flow, and — of course — solid dividend yields.
That process serves as a “giant funnel” that whittles about 5,000 potential candidates down to about 50, Kelley said. And inadvertently, the model also tends to spot companies in sectors that are “almost poised to have a turnaround,” Kelley said. That’s because dividend yields rise as stock prices fall, so there can be a correlation between high yields and beaten-down names.
But ironically, Kelley said that the fund’s largest sector allocations right now are to consumer staples and energy, which are two of the three best-performing sectors of 2022.
Of the five stocks that Kelley provided a thesis for, four of them are in one of those sectors, while the other is in the financials sector. Those names are below, along with each stock’s ticker, market capitalization, dividend yield, and commentary from Kelley for each.