As a result of the pandemic, many investors expect a continued economic contraction in the short term, and ongoing pain in the intermediate term until a vaccine is widely available. Hennessy Focus Fund Co-Portfolio Manager David Rainey joins The Final Round panel to break down why long-term GDP and corporate profits are at as much of a risk as initially thought.
MYLES UDLAND: Let's talk a bit more about what's going on in the markets today. David Rainey joins us now. He's the co-portfolio manager at Hennessey Focus Fund. So David, let's just start with today's market-- the S&P trading above its record closing high. Go back in time five months. How surprised would you have been to be told in mid-August that the S&P is back at a record?
DAVID RAINEY: Sure, no, absolutely very surprised after the liquidity event-- the negative liquidity then in the first quarter. But you know, the market today is looking out 12 months. The market today is focused on therapies and vaccines. It's focused on government assistance, and the market's focused on children going back to school so their parents can go back to work. And all of those factors seem to be moving in the right direction at the moment, and so the market has had a very solid last few weeks.
MYLES UDLAND: And so David, you write that about 70%-- 3/4 of your portfolio right now-- is companies you think are going to be, you know, weathering this downturn with what you call relative ease. I guess one, what would relative ease in this sort of environment be like? And two, are these-- you know, is this based on what you think is happening with these businesses now, or is it how quickly sort of they'll resume their normal course of business with, you know, customer demand and things like that?
DAVID RAINEY: Well, you know, actually, I would say that 70% will basically pick up where they left off, and they're seeing strong demand for their products and services. The other 30% or so will take several years longer. An example of that might be Hexcel, which makes carbon fiber components for commercial aerospace, and we've all seen what's going on with Boeing and Airbus today.
So Hexcel is a dominant company in what they do. It will just take several years for demand to kind of catch up to where it had been, so we don't expect them to be back at 2019 levels in the next year or two. But companies like American Tower or O'Reilly Automotive are seeing very strong demand for their products and services today.
MYLES UDLAND: And then thinking about your portfolio, I mean, during the last few months, were you active in adding names that you'd had on a watch list for a while? Did you add to positions you already had? How much turnover did you do you feel compelled to have I guess relative to what your baseline would have been, you know, given the dislocations--
DAVID RAINEY: Sure. Sure, we're long-term-oriented investors. We do a lot of our own due diligence. Our average holding period is seven, eight years. So that means in any given year, we need only add one or two new names to keep the portfolio fresh, if you will.
In the first quarter, we did not make any tactical changes. We didn't go to cash. We didn't move into defensive names. We didn't begin to trade the market. That's not what we do. But we did add one new position in the first quarter. That's RH, which is the newest incarnation of Restoration Hardware.
We took advantage of a stock that was down 60% or 70% to make an initial small position. And it's too we didn't reallocate everything into retailers because they've been on a rocket ship glide path up for the last three or four months. But RH we think will be an important holding going forward.
We also added a new holding in the second quarter, which was Fastenal, a name that had also come under some pressure. It's a distributor of maintenance repair and operations products across the US industrial base. So you can see that they would have been hurt in the first quarter, and so we were able to add shares at attractive prices in the second.
SEANA SMITH: Yeah, David, I want to ask you just how you're factoring in the election that's coming up in the next three months because we heard Joe Biden's pick for the vice president, Senator Kamala Harris yesterday. How much are you factoring the elections uncertainty into your investment strategy, and are you changing it at all as a result of that?
DAVID RAINEY: No, I mean, not with a collection of 20 carefully curated names with an average holding period of seven, eight, nine years. Elections come and go. Politicians and their priorities come and go. We're looking for businesses with important secular growth wins behind them that we think that will power mid-teens growth and earnings for a long period of time. So the election persay, though it will certainly create a lot of chatter, doesn't directly affect us or our thinking over the next year or two.
MYLES UDLAND: All right, David Rainey with Hennessy Focus Fund, thanks so much for joining the program. Great to get your thoughts.
DAVID RAINEY: Certainly. Thank you.