MW Beyond the Fed and AI: Five-star manager offers small-cap stock picks that could be giants.

By Barbara Kollmeyer

Hennessy's Josh Wein is finding plenty of overlooked names these days

Compass could prosper if the Fed is about to start cutting interest rates, but could also go the way of a Redfin buyout, says Hennessy Cornerstone Growth Fund portfolio manager.

Small-cap stocks have been on something of a roll lately. After eight straight years of lagging behind the S&P 500 SPX, the Russell 2000 RUT seems hot on its heels with a nearly 7% gain versus 10% for the former.

A widely expected Fed rate cut next week could help that momentum, as lower borrowing costs are seen as particularly supportive for smaller companies.

Josh Wein, a portfolio manager for the $516 million Hennessy Cornerstone Growth Fund HICGX, believes smaller companies are due some time in the sun.

"I think that this huge disparity between small, mid and then large-cap performances will tighten," Wein told MarketWatch on Monday, as he added another reason to give smaller companies a second look: "In some cases, you do have the potential for [a smaller company] becoming a larger-cap name at some point."

Fed rate cuts are of lesser importance for the five-star Morningstar-rated fund, which adds or subtracts companies strictly once a year. The criteria for new entrants are companies that trade at less than one and a half times sales, have annual earnings growth, and have seen three to six months of positive stock-price performance. They are then ranked in order of their most recent 12-month price performance.

He admits that his small-blend fund does actually include some bigger names like Walmart $(WMT)$, which brings him to his first stock pick, Weis Markets $(WMK)$, a Pennsylvania grocery store chain that got its start in 1912 and now boasts around 200 stores.

"It's just a defensive-type name, very core to any economy, and it fit our criteria for momentum, valuation and earnings growth," he said. "I think there was a time when grocery was an enormously popular play for equity buyout firms."

"We're not predicting that it's going to be bought, but it's just the idea that these companies are dependable and consistent free cash flow generators. And I don't know if they benefit from AI or the idea that rates go lower, but I just think that these names are forgotten about generally by people who can't tear themselves away from AI headlines," he said.

He also flags Root $(ROOT)$, a technology-enabled car insurance provider. "Using data from someone's cell phone, they're able to figure out what kind of driver the person is and price a policy accordingly," said Wein. A newer holding, Root made it into the portfolio during the annual spring reconstitution. "I think Root has been a nice growth story," said Wein.

His final stock pick is real-estate brokerage platform Compass $(COMP)$, which he sees as a potential beneficiary as home prices start to bottom out.

"The Fed lowering rates could be a great thing for mortgage rates, but then again, the two don't necessarily go hand in and, so we could get rate cuts without mortgage rates coming down. We might not get rate cuts, but maybe mortgage rates come down," said Wein.

With Compass, he feels it's a good time to be looking at those sorts of companies, given their history of holding a similar name. "We at one point owned Redfin and it was a similar idea where it's like, this is the time to be looking at things that benefit from real estate volumes or transaction volumes, and then it was bought by Rocket," he said.

All three of the stocks he flags "represent potential acquisition candidates from either strategic or financial buyers due to their favorable valuation and market positioning."

"We've seen it in real estate with Redfin, we've seen it historically with supermarkets and we've seen it, you know, with tech-enabled [companies], in this case, insurance," he said.

The bottom line for all of his picks is that they are "small/mid cap names that we feel fly under the radar and likely don't garner the valuation that their larger-cap peers would exhibit," he said.

From the archives: This five-star fund's formula rode Super Micro's gain, while its disciplined strategy avoided the stock's brutal decline

The markets

U.S. stock futures (ES00) (YM00) (NQ00) are mostly higher, with Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD30Y steady. Crude prices (CL00) are up as investors watch rising Middle East tensions.

   Key asset performance                                                Last       5d      1m      YTD 
   S&P 500                                                              6512.61    1.51%   1.04%   10.73% 
   Nasdaq Composite                                                     21,879.49  2.82%   0.91%   13.30% 
   10-year Treasury                                                     4.093      -12.80  -15.20  -48.30 
   Gold                                                                 3683.1     1.75%   8.10%   39.55% 
   Oil                                                                  63.31      -0.72%  0.91%   -11.91% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Federal Reserve Gov. Lisa Cook can stay at her post for now, a judge has ruled, delivering a setback to President Donald Trump who wanted to fire her over a mortgage fraud allegation.

Oracle shares $(ORCL)$ are climbing as investors looked past disappointing revenue and earnings from the cloud giant to focus on talk of new multibillion-dollar deals.

GameStop $(GME)$ stock is up 6% after the videogame retailer and original meme stock posted a fifth-straight quarterly profit and higher sales.

Klarna's IPO priced at $40 late Tuesday, well above its expected range. The fintech will start trading Wednesday on the NYSE under the ticker "KLAR."

Producer prices for August are due at 8:30 a.m., with core prices expected to rise 0.3% on the heels of a 0.6% rise. Wholesale inventories are due at 10 a.m.

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The chart

Small-caps are also on the radar for Topdown Charts' head of research and founder Callum Thomas, whose chart drives home the lack of investor love for the asset class. "Through a combination of portfolio drift (market movements) and active allocations (fund flows), U.S. investors are running record low allocations to small cap ETFs," he writes. And he said that just ticked up. "When you see a sentiment/positioning indicator go to an extreme and then tick up, that's the most powerful signal you can get. So another support to the bull case here."

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   GME     GameStop 
   NVDA    Nvidia 
   TSLA    Tesla 
   ORCL    Oracle 
   NIO     NIO 
   AAPL    Apple 
   PLTR    Palantir Technologies 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 
   OPEN    Opendoor Technologies 

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-Barbara Kollmeyer

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September 10, 2025 07:00 ET (11:00 GMT)

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