Nov. 13 (Bloomberg) -- Frank Ingarra, co-manager of the Hennessy Focus 30 Fund, is investing in mid-cap consumer companies such as Ross Stores Inc. and brokerages such as Stifel Financial Corp., and says equity markets will stabilize by mid- 2009.

The $193 million fund uses a quantitative model to pick 30 U.S. growth-oriented stocks with market values of $1 billion to $10 billion, resetting the holdings once a year.

Focus 30's five-year annualized return of 3.7 percent beat those of 95 percent of its peers, according to Morningstar Inc. Morningstar raised its rating on the fund to four stars out of a possible five on Nov. 4.

Ingarra joined Novato, California-based Hennessy Funds in 2000. He was previously head trader of two funds for O'Shaughnessy Capital, led by James Patrick O'Shaughnessy, author of ``How to Retire Rich'' and ``What Works on Wall Street.'' Ingarra co-manages all six of Hennessy's funds, worth $700 million before today, from an office in Stamford, Connecticut.

He received a bachelors degree in mechanical engineering from Villanova University and a masters in business administration from Hofstra University. He spoke in an interview in New York yesterday.

Jarzemsky: What's your investment strategy?

Ingarra: The companies have to be between $1 billion and $10 billion, so in the mid-cap space. They have to have a price- to-sales ratio below 1.5. That's our value criteria. We want them to have enough sales to support their stock price. And then they have to have positive earnings over the previous year so their sales are going to the right place, the bottom line. Then they have positive three- and six-month stock price appreciation. The ones that pass, we rank by 12-month stock price appreciation. We buy the 30 that meet our pre-screens in equal dollar amounts.

Jarzemsky: When was the most recent time you reset?

Ingarra: We never tell anyone the exact date, but we did it last quarter.

Jarzemsky: What were the trends of the last rebalance?

Ingarra: You try to read the tea leaves and see what the formula's telling you. The biggest thing is consumer discretionary. We went from three stocks to 10 stocks, so a third of the portfolio is in that. But if you break it down, it's in a lot of different sectors. You have stocks in there like Corinthian Colleges, which is post-secondary education. If you think there's going to be a lot of slowdown in the economy and people are looking for jobs, they might have to go back to school to get some skill sets. You can get advanced degrees, criminal justice, that hopefully will benefit them.

Another one is Ross Stores, which is a little low-end. They have a good amount of apparel for people, so obviously if the consumer's feeling strained and they're running out of a job, they still need clothes. They'll probably trade down to a Ross Stores. There'll probably be a lot of benefit with a lot of other retailers going bankrupt to get some interesting traction and expand their brand. So that was another interesting one that came in.

Rent-a-Center, you can't afford to buy a TV, but you can rent to own. So that's another interesting name that came out of there. One of the last ones is Hasbro who, they've done a great job in creating educational toys. I have two kids, a 3 1/2-year- old and a 6-month-old and, you know, Christmas is going to come. The holiday season is going to come. You're still going to buy some toys, maybe not at the same level.

Jarzemsky: This has been an unusual year. Was there anything you changed when rebalancing this time?

Ingarra: No. For us, we're non-emotional. We're kind of like dating all of our stocks every year. We don't want to fall in love with them and think that they're going to be the next best thing for the next two or three years.

For this year there were no keepers, so there was 100 percent turnover. The year before, there were no financials, the model kicked out all financials, which was perfect. This year it added two insurance stocks and two broker-dealers, Stifel Financial, which is a regional player, and Raymond James, both of them. Raymond James had not a great write-up in Barron's this past week, but both of those two companies are set to benefit from the lack of major players, meaning the fall of Bear Stearns, the fall of Lehman, they'll be able to hopefully capture some more market share and become bigger players. Because you still need investment banks, you still need money managers, asset managers, things like that.

The insurance companies too, obviously, with the changes and the challenges at AIG and all these other companies, the two ones that came in were Odyssey Re Holdings, that's ORH, and Hanover Insurance Group. Both pretty much property, casualty, they don't have a ton of exposure to a lot of these exotic derivatives that AIG had. With all the change going there, the smaller company, midsize company, they're in a good position to capture some market share.

Another big weighting that did decrease would be industrials. Last year we had 10 stocks; now we have seven. To me that still makes sense that they're going to continue to be in there. You have China coming out a couple days ago and saying they're still going to invest in infrastructure. You have, when President-elect Obama comes in, some of the stimulus that they're talking about doing is building infrastructure, we need to do that here.

So these type of companies just make sense and some of the names, Lennox International, LII, they do a lot of manufacturing for heating and ventilation, air conditioning. So they should be able to benefit from any building improvements. You still need, especially in the Northeast, you still need to fix and deal with your heating and cooling system.

Another one is Teledyne Technologies. They are aerospace, defense. Obviously, we still have a war going on, so they're going to be doing some stuff there. They sell a lot of stuff all across the world, too. Tetra Tech, which is an interesting one, TTEK, they do a lot of engineering consulting, construction, technical services for resource management and infrastructure. They do a lot of clean-water stuff and, you know, infrastructure in general. They do stuff overseas, so they're another good company that you've got.

Jarzemsky: What are some companies you'd invest in if you weren't playing strictly by the numbers?

Ingarra: Every year the model comes in, you look at these stocks and you're like, are you kidding me? We're going to buy these? But you can't argue with 2005, this was the No. 1 diversified equity fund in the country. We don't play the Monday-morning quarterback. We stick to our formula. For this model, we're very happy with what's going on.

The challenge of most quantitative models is that black-box thing: Nobody knows what's going on. Why we're different and why we think people should consider us is because we actually open the black box. In our prospectus, our formula's right there, so you know at any time how money's being managed.

Sometimes in short periods of time it does underperform, but we've developed these models to work over long periods of time. Our five-year numbers look great for this fund compared to the indices. Short-term, we're like everyone else, getting kicked in the teeth.

Jarzemsky: What do you expect for the rest of this year?

Ingarra: They're probably going to come through and say the recession started in December or January. So we're pretty far along in the recession, we think. After we get through all this short-term volatility, we'll be able to see a turnaround probably mid-next year.

We use price-to-sales ratio, as we discussed. Let's just take S&P. As of the other day, the current price to sales ratio was 0.91. So if you assume that sales are going to lower across the board in the S&P by 10 percent, we could see the S&P, to get back to historic levels of 1.527 -- which is the price to sales ratio -- we could see the S&P pop 51 percent from here. The worst case, to justify the current price-to-sales ratio in the S&P 500, the sales would have to lower across all 500 companies by over 40 percent, and we just don't think that's realistic.

To contact the reporter on this story: Matt Jarzemsky in New York at mjarzemsky@bloomberg.net.

Last Updated: November 13, 2008 10:39 EST