Investor's Business Daily, June 18th, 2007
Whether the market is up or down, it's just another day at the office for Donald Hodges.
"We do the same thing we always do," said the 73-year-old Hodges, who with his 44-year-old son Craig co-manages the fund bearing their last name. "We have more good ideas than money."
The Hodges have a flexible approach. They build their $692 million portfolio with three different types of stocks. One consists of healthy, steady growers. The second is made up of young, fast-growing names. The third is temporarily tainted stocks, trading at beaten-down valuations.
This three-pronged strategy has yielded above-average results. Going into Monday, the fund was up 14.11% this year. Its mid-cap blend rivals tracked by Morningstar averaged 12.61%.
The S&P 500 was up 9%.
Over the past three years the fund's average annual gain was 23.90% vs. 16.16% for its peers and 12.70% for the S&P 500.
U.S. Global Investors GROW is an example of a fallen angel in the fund. It was also a top buy by the fund in its latest disclosure period.
U.S. Global is a fund company whose portfolios focus on commodities and foreign stocks, especially emerging markets. The asset manager is down 30% this year. Its sell-off began as 2007 got under way. It then rallied through early April, but failed to reach its old high.
The stock was hurt by declines in prices of key commodities like copper and crude oil. In several instances, the pullbacks began last summer and continued through midwinter.
"So U.S. Global had outflows by commodities and foreign stock investors," he said. "But with that area warming up again, I suspect money will move back in. We're betting on that company's management. And we're betting on foreign funds and commodities staying interesting for quite a period."
Hodges calls steady growers his core holdings. Those tend to be long-time positions. Schlumberger SLB is one. It's also a top holding.
Biggest And Best
"They are the largest and best oil services company," Hodges said. "They do a whole multitude of things in the area of producing oil and gas. Halliburton is another player in that field. But Schlumberger is bigger. Their growth is steady."
Earnings per share growth has ranged from 62% to 93% for eight quarters. The stock is up 34% this year.
The fund's young, fast-growing names are often momentum stocks. One such play is Tempur Pedic International TPX. The bedding products maker was another top buy in the latest period.
The stock, up 30% this year, has been consolidating since mid-April. It dipped below its 50-day moving average, but climbed above it on decent volume.
The company announced an amendment to a credit deal with several banks on June 8. Basically, many investors seemed to balk at the company taking on more debt. But, Hodges says, the firm is extending its debt so it can buyback more of its own shares.
"That shows they've got confidence going forward," Hodges said. "That's part of why I like them. Although it has some risk to it."
Since having flat EPS in the third quarter of 2005, the firm has had quarterly EPS growth of 12% to 48%.
Versatility Vantage
Hurco HURC was another top buy. The industrial technology firm is up 50% this year.
"They're sort of a machine-tool stock," Hodges said. "Not everybody buys them because that sort of stock is never on anyone's front page. But they have software that converts a machine tool into eight to 10 different things."
The firm benefits from rising emerging-market demand for machine tools. Hurco's software gives its products versatility, Hodges says. "Their U.S. business is not growing," he added. "But their foreign business is."
