Investor Neil Hennessy says megacap tech trade is 'over' and to buy these two stocks instead

Published Wed, Jun 26 202411:16 AM EDTUpdated Wed, Jun 26 202411:44 AM EDT

Neil Hennessy said investors need to look at value stocks that offer attractive price-to-sales multiples and avoid what he sees as a dying "Magnificent Seven" trade. The Hennessy Funds CEO said buying the Magnificent 7 , the group of megacap tech stocks credited with driving the market higher for the past year and a half, is no longer smart after their monster runs led to exorbitant multiples. Instead, Hennessy, whose firm runs assets of about $4 billion , advised investors to look at value stocks such as car dealer Group 1 or emergency, rescue and fire equipment maker Oshkosh Corp. With "the Magnificent Seven, that game's over," he said on CNBC's " The Exchange ." "The boat's already sailed." While Hennessy admitted that the Magnificent 7 stocks have performed well, he said their average price-to-earnings multiple sits at around 47 while their price-to-sales multiple is above 12. "Get real," Hennessy said of those valuations. The money manager, who started in the stock market in 1979, said artificial intelligence, the buzzy technology that has captured the imaginations of investors since late 2022 and given upward momentum to megacap tech, could now be overblown. "The reality of our world is money is shifting over to value," said the University of San Diego alum. "Where the euphoria is in AI and crypto — and I'm not sure you really want to be there." .SPX OSK,GPI YTD mountain The S & P 500 vs. Oshkosh and Group 1 For investors interested in value, Hennessy said one of the most important numbers to look at is price of the stock to sales. As a general rule, Hennessy said he wouldn't pay more than $1.50 for $1 in sales. At Group 1, that ratio comes out to about 20 cents on the $1 in sales. He noted the company does the "whole nine yards," selling new and used cars and maintaining them. Group 1 also sports a below-market price-to-earnings multiple of 8. Group 1 shares have bucked the broader market's uptrend in 2024, slipping more than 3% on the year. But Wall Street sees a turnaround ahead, with the average analyst polled by LSEG holding a buy rating and price target implying upside of more than 20%. Oshkosh Corp. shares have also underperformed this year, retreating about 2.5%. But Hennessy said the stock is attractively priced, with a price-to-sales multiple of 0.9 and P/E ratio of just 7. The average analyst has a hold rating, according to LSEG. But the average price target implies the stock can turn around and surge more than 27% over the coming year. OSK YTD mountain Oshkosh shares in 2024.