NEIL HENNESSY
LEAD MANAGER
HENNESSY FOCUS 30 FUND

COMPANY: Labor Ready Incorporated
TICKER: LRW (NYSE)
PRICE: $23.62 (as of 4 p.m. yesterday)
52-WEEK RANGE: $16.27-$26.50
MARKET CAPITALIZATION: $1.26 billion

Neil Hennessy is the founder of Hennessy Funds.One of the funds he manages, the Hennessy Focus 30,was ranked the no. 1 fund of all diversified equity funds by Lipper for 2005. It uses a quantitative investment process and has returned 23.09% annually since its inception in September 2003. Mr. Hennessy spoke to David Dalley of The New York Sun and explained his unique methodology, and why the temporary staffing company Labor Ready is one of his top 30 buys.

How do you choose which stocks to include in the Hennessy Focus 30?

Everything we do here is quantitative and highly disciplined. We’re nonemotional when it comes to investing. For the Focus 30, I screen approximately 9,700 different companies using a variety of criteria.

The first screen is market capitalization.This is a mid-cap fund, and a company has to have a capitalization of between $1 billion and $10 billion to be considered. Also, the stock price has to be higher than $5 and it has to be a U.S. company.

The next screen we look at is the price-to-sales ratio. It has to be 1.5 or less. In other words, we won’t pay more than $1.50 for $1 in sales.

The next test is earnings – they have to be higher this year than in the previous year. We want earnings to be growing.

The companies that are still standing then move onto a “relative strength” analysis. We check to see if the companies have positive relative strength over the last six months.

What do you mean by “relative strength”?

We want to see positive price momentum.The stock price needs to have increased over the last six months and over the last three months. We want stocks that are trending up, not down.

Finally, we look at 12-month relative price strength. We rank the remaining stocks by their relative price strength over the last year, and we buy in equal dollar amounts the 30 best companies. We hold those for approximately one year and then rebalance using the same methodology.

So in the case of Labor Ready, you’re not really interested in the company itself, you’re just looking at the numbers, right?

Right. If you look at LRW, it has a price-to-sales ratio of 0.93. So what you’re doing is paying 93 cents for every dollar in sales. That’s the first screen.

Second, their earnings are higher than in the previous year. In 2005 LRW earned approximately $1.28, versus 87 cents the year before. And it passed the relative price strength screens over a three, six, and 12-month basis.

What risks are associated with the strategy?

Well, you’re investing in an equity market, so you have the overall market risk to think about, interest rate risk, economic and political risks, etc. But that’s all true of any equity investment.

What we do is buy quality investments. And we diversify – we own more than 30 stocks. Even if one of those companies went broke, it would only represent 3.3% of the portfolio, so it wouldn’t be fatal. And we don’t get overweighted in one particular sector or stock.