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We sat down with Brian Peery, Co-Portfolio Manager of the Hennessy Cornerstone Mid Cap 30 Fund, to talk about what makes mid cap stocks different, and how the economy is recovering.

So lets talk about your Mid Cap 30 Fund are there any things to keep in mind when youre looking at mid caps as opposed to smaller or larger companies? Are you looking for growth, stability, value, or some combination of the three?

Were definitely looking for a combination. Were looking for growth at a reasonable price. A lot of people building allocation will leave mid caps out of the mix. They have large caps and small caps because they want to be diversified but there are a lot of benefits that are particular to mid caps. For instance they have the market share and size that means they dont run the same risk of bankruptcy as a small cap. But theyre also small enough so that theyre able to make decisions that really change their bottom line. Its much harder for huge companies to make decisions that will move the needle.

Click on the interactive chart to see returns for some of Brian Peerys stock picks over time.

Is the stock market still a good place to put your money after its huge year? Arent people right to say its starting to get overvalued?

I wouldnt call the stock market overvalued. Id say its still undervalued a little bit. And besides, if you did see a pull-back, even of 5-10% wed see that as a huge buying opportunity. As far as 2013 goes of course we didnt expect a 25% yield, thats high. But that doesnt mean that the market necessarily will go down. It probably wont go on the kind of run that it did this year, but I still think its going to be a boom market, of somewhere between 8-12%.

If the economy is really recovering, why do you think companies are still reluctant to hire, and why are they sitting on so much cash?

Now, when companies are making lots of cash, they need to re-deploy it somehow. And if theyre concerned about what their costs are going to be in the coming years, with regards to healthcare or new regulations, its going to make them less willing to hire. Which means that they do other things with it, particularly things that will reward shareholders in a low-growth market: buy backs, dividends, and acquisitions. Now acquisitions arent particularly good for hiring, but theyre great for cost control and market share. And the trend we saw in 2013 was a lot of smaller companies embracing those opportunities to reward shareholders.

However I think thats starting to change as companies try to figure out different ways to get a leg up on the next five years, which as a said I think will be a boom market.

Are there draw backs to sitting on cash — is Carl Icahn right to be pressuring Apple to part with some of its billions?

They have more cash than they can use. When you start to look at these companies the question emerges of what exactly the catalyst for new spending will be. The trend weve seen so far is that they want to spend it on internal infrastructure or theyve been hoarding it because theres no deferral cost. But that climate will go away when companies start to see a light at the end of the tunnel and the recovery becomes more tangible. Were also seeing dividends become a much more important criterion investors want when theyre picking stocks. In our mid cap fund weve seen two thirds of our portfolio implement or increase their dividends this year.

As bonds get more valuable and competition increases on those dividend stocks do you worry about driving the price of some of those stocks down?

That certainly used to be the perception, and in a high yield environment that might certainly be true. But increasingly dividends are becoming a condition for investors. They want well-managed companies with an attractive yield, but they also want a stock is also going to be higher in value after ten years. Thats what the investor wants: appreciation and security. Dividend stocks provide that income but theyre also probably going to be higher after a few years as well.

You think that in 2014 interest rates are going to stay very low. Why? Are you comfortable with Yellen at the helm? How long can the rates continue without risking damage to the economy?

At our fund we had certain catalysts that we believed were going to precede tapering, and those have started to come, mainly that weve seen 200,000 new jobs per month for 3-4 consecutive months. Next week when the Fed gets together, when to taper will almost certainly be the elephant in the room. I dont think tapering will come in December, but I think theres a good chance that come early 2014 well start to see, at the least, some asymmetrical tapering. Since the housing markets recovery is still pretty slow, I wouldnt be surprised if the Fed opted to continue focusing on mortgage buy backs and starting to taper bonds. Waiting too long on that could start to see inflation rise. But the numbers are still very attractive, I dont think they need to pull the trigger for a while.

Do you see Janet Yellen doing a good job of steering us off?

I think the market likes Yellen, but its also important to note that she will have a very pro-active board. Its not just her at the helm, and there are still enormous benefits to keeping a low interest environment. Besides, theres a good chance that rising interests could have a positive impact on the economy if its being done for the right reasons. Theres a good chance that the market will view that as a sign the economy is improving faster.

What are some of your stock picks?

So a big one for us is Lithia Motors (LAD ). Theyre a company thats basically doing everything weve talked about. Earnings per share and sales per store are both up in a low growth environment, which we really like to see. Also in general we see them making a lot of smart acquisitions. Auto retailers are often still mom-and-pop stores, so theres a lot of acquisition targets and potential to build their brand.

Another one is Brunswick (BC ). A lot of people know them from the bowling balls but they have a very large marine business (which owns things like Boston Whaler among others). Boat retail is something that still really hasnt recovered at all since the crash, sales are at 60% of the levels we saw in 2007. We also like the company because we think theyve done a great job of managing their money paying down debt and stuff like that. We think if that continues they could improve free cash flows by as much as two times, which would mean double digit EPS growth for the year.

A third stock we really like is Alaska Airlines (ALK ). Now airlines in general are very consumer-focused, the customer has a lot of purchasing power. And Alaska Airlines leads the industry for on-time performance and won the JD Power and Associates award for best customer service for the last six years. In an industry where the customer has choices those things are really important. But theyve also done a great job of managing their money. New dividends have just been instituted, their pensions are fully funded, and theyve got no debt. These are all very good signs.

Do you agree with Hennessy Funds Mid Cap 30 investing strategy? Keep reading for more of Brians stock picks.

Click on the interactive chart to view analyst ratings for Brian Peerys stock picks over time.

Do you see investing opportunities in mid cap stocks? Use the list below to begin your own analysis.

3. Alaska Air Group, Inc. (ALK. Earnings. Analysts. Financials ): Operates as an airline company serving destinations in the western United States, Canada, and Mexico. Market cap at $5.02B, most recent closing price at $72.31.

4. Goodyear Tire & Rubber Co. (GT. Earnings. Analysts. Financials ): Develops and sells tires, and related products and services to consumer and commercial customers worldwide. Market cap at $5.59B, most recent closing price at $22.33.

5. Pilgrims Corp. (PPC. Earnings. Analysts. Financials ): Produces, processes, markets, and distributes fresh and frozen chicken products to retailers, distributors, and foodservice operators primarily in the United States. Market cap at $4.15B, most recent closing price at $15.95.

(List compiled by James Dennin, based on stocks in the Hennessy Funds Touchstone Mid-Cap 30 Fund. You can read more about the fund here .)

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