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Get Four
|  | NOVEMBER 24, 2004
Riding the Railroad Boom Don and Craig Hodges of Hodges Fund say high fuel costs are benefiting the rail industry. They also like steel and high-tech stocks What stocks will do best in the days to come? Don and Craig Hodges, the father and son team who co-manage the Hodges Fund (HDPMX ), say transportation, steel, and high-tech stocks should come out on top. As Don Hodges explains it, railroads are particularly attractive partly because high fuel costs are affecting other modes of transport more severely and because many goods arrive from China on the West Coast and then continue by rail. Their favorite railroad is Burlington Northern Santa Fe (BNI ), but they also like a few truckers, including Yellow Roadway (YELL ) and Frozen Food Express (FFEX ). In high-tech, the picks include data-storage company EMC (EMC ), Sun Microsystems (SUNW ), and Texas Instruments (TXN ). Their largest holding is Commercial Metals (CMC ). Craig Hodges says the fund looks for the best stocks all over the market -- small- or large-cap, growth or value. "We're very stock-specific," he says. Don Hodges reports that "on a three-year annualized basis, our return is 17.51% per year, while the peer group is 3.93%, and the S&P is 2.34%." The Hodges made these points, and more, in an investing chat presented Nov. 18 by BusinessWeek Online on America Online, in response to questions from the audience and from Jack Dierdorff and Karyn McCormack of BW Online. Following are edited excerpts from this chat. AOL subscribers can find a full transcript at keyword: BW Talk. Q: Don and/or Craig, do you think the post-election run-up in stocks can keep going? Don: I think they can in some categories. Maybe not the whole broad market, but I do suspect we'll end the year at a higher level than at the present. But I do expect to see the transportation stocks, steel stocks, and high-tech stocks to do well through the end of the year. Q: The transportation and commodities stocks have already had big runs. Why do you see more strength? Don: Primarily because, in the past, commodities and the industrial stocks have been more cyclical, where they'll go up for a few months then the cycle will go the other way. We think this time the cycle could be more of a growth cycle that could last two or three years. The market is conditioned to expect them to go back down, but I think the market is wrong, and this is primarily because of these stocks' earnings. Q: Tell us something about the Hodges Fund and its strategy. Craig: Our strategy is to go where the action is. We'll buy small-cap, mid-cap, large-cap. We'll buy momentum stocks, value stocks, or core growth stocks, depending on where we feel is the best area to concentrate. So depending on what's going on out there, we feel like we'll be in the right area and emphasizing the right stocks. Don: Our one-year [return] number through yesterday was 19.49% -- our peer group is 14.71%, the S&P 14.42%. On a three-year annualized basis, our return is 17.51% per year, while the peer group is 3.93% and the S&P is 2.34%. So our numbers have been very good. We also outproduce our peer group and the S&P on a 5-year and a 10-year basis. Q: We talked about transportation and commodities stocks -- what are your favorites in these areas? Don: Our favorite transportation stock is Burlington Northern Santa Fe. The railroad industry is beginning to experience some of the best business they've seen in 25 years or more. The public isn't aware yet of how well the railroads are beginning to do. There's a shortage of trucks and truck drivers -- high fuel costs are sending some people to railroads, and a lot of the merchandise coming out of China is being distributed on rail. We also like some of the trucking stocks. Even though the fuel cost is a negative to them, they're able to pass that off as a surcharge. That does make them a little less competitive than the railroads. We like Yellow Roadway, and Frozen Food Express is having a terrific year. Another trucker, going from Canada to Mexico, called Celadon Group (CLDN ), has been having a great run recently as well.A potential turnaround that we're taking a small position in, but hasn't yet given evidence of doing better, is Central Freight Lines (CENF ) -- went public this year around $17 and is now at $6.50. Q: Don, last time we spoke in October, you thought the tech sector would turn around. What stocks do you like in tech? Don: I think a number of them could turn around because they've had three hard years of tax selling.... We're seeing some of these stocks pick up -- the few we bought a little while ago, EMC and Sun Microsystems, are starting to show a return. We also own Texas Instruments.... It's my bet we'll see these all a little higher by March or April than we're seeing now. Q: How about the pharmas? What might be the future outlook for Pfizer (PFE )? Don: We had Pfizer in our portfolio, and we sold it a few days ago out of fear that the cox-2 inhibitor problem might spread to them. There has already been some noise made that their products could get hit, which would mean the same problems for Pfizer as for Merck (MRK ) [and its Vioxx drug]. However, if [Pfizer's] Celebrex doesn't turn out to be a problem drug, this could be a boost for Pfizer. Q: How many securities are in your portfolio? What's the asset size and turnover? Top five holdings? Craig: We have currently around 65 stocks -- that's usually the number, between 55 and 70. We have just under 100% turnover, and we feel like that's pretty normal for an actively managed account like ours, where we're going where the action is. Top five holdings are Commercial Metals, Luby's Cafeterias (LUB ), Centex (CTX ), Terex (TEX ), and Starbucks (SBUX ). Q: What stock category do you shop in -- small vs. large, growth vs. value? What area looks best now? Don: I don't know that we necessarily look at category, but we do see action in the transportation stocks, in some of the high-tech companies that are debt-free and well-financed. We see action in the steel companies and cement companies. We're more inclined to look at specific companies and look at earnings and what the stock will do, vs. looking at a group and allocating money based on that. We're very stock-specific.
BW MALL
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