November 19, 2003

Fund in Focus: Hodges Fund

Don Hodges and Craig Hodges, managers since Octobe

Nov. 12, 2003 -- What kind of stocks does Hodges Fund (HDPMX) buy?

"It's a blend that would include almost anything we think is likely to go up in the next 18 months," says Don Hodges, who manages the portfolio with his son, Craig.

What size companies does it invest in?

"We look at the whole universe," the elder Hodges says. "We just look for opportunity wherever we find it."

That go anywhere, do anything approach to investing hasn't hurt the fund's returns lately. After losing 26.3% in 2002, the $32.1 million fund rebounded to gain 67.8% this year through October, outpacing its small-cap growth fund peers, which were up 39.1%

Generally speaking, the fund's holdings fall into three categories. The first is made up of companies that have consistently rung up strong profits and sales over the long run, and whose stocks trade at relatively high multiples.

Retailers Home Depot (HD) and Wal-Mart Stores (WMT) are in this group. In addition to their steady growth, both dominate their competitors, notes Hodges, who favors industry leaders.

Next, the managers hunt for cheap stocks that they think have loads of value. Hodges cites Texas Pac Ld Tr (TPL) as typical of these kinds of investments. The trust owns more than a million acres of land in Texas that was previously the property of the Texas and Pacific Railway Co. It makes money by selling or leasing the land, from royalties on the more than 3,000 oil and natural gas wells on it, and from interest on investments.

The trust is attractive, Hodges says, because it uses the money it makes to buy back its shares. Hodges thinks its stock can probably double in price.

Venturing deeper into the value forest, the fund, Hodges says, will buy stocks "that have really been trashed," but that the managers view as "good turnaround situations."

For example, Hodges says, take Tyler Technologies (TYL), the fund's No. 1 stock. The company, which provides software to state and local governments, stands out in part because it has few rivals, so once it signs up a customer, the business "seems to stick," he says. Hodges adds that Tyler is debt-free, starting to become profitable and growing rapidly.

Another company that's not yet earning money but that Hodges thinks will within a year or two is XM Satellite Radio`A` (XMSR), which ranks third in the portfolio. Hodges also thinks shares of XM, which provides entertainment and information programming for radio stations, can appreciate. The fund had realized a 410.6% gain on its stake in the company for this year through the end of last month.

Another of the fund's best performers this year, Hodges says, is Intervoice Inc. (INTV), which develops and sells interactive voice response systems, such as voice mail, for telecommunications networks. The fund's shares were up 468% for this year through October.

The fund had also gotten a boost from prison operator Corrections Corp of Amer (CXW). The fund's shares of the company were up 436.8% for this year through the end of last month. In addition, its shares of E Trade Group (ET), which provides brokerage and other financial services electronically, were up 81.3% for this year through October, and its Home Depot stock had risen 42.6% for the same period.

Hodges says the fund has also benefitted from the decision by him and his son to take slightly larger positions in stocks they really like and to thin the portfolio, decreasing its membership to about 50 from 60 in last year's fourth quarter.

Previously, Hodges explains, the fund often owned so few shares of winners that they didn't have a significant effect on returns. The managers felt that owning more shares of a smaller number of companies would work in investors' favor, "and it's worked out that way," Hodges says.

Nonetheless, Hodges prefers a concentrated fund to one with a laundry list of investments because he thinks the narrow focus helps produce above-average returns. "The more stocks I own, the more I'm going to perform just about like the market," he says.

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