Hodges Fund's Bets in Texas Pay Off

"Don't Mess With Texas" may even apply to the investing world.

The Dallas-based Hodges fund, co-managed by the father/son team of Don and Craig Hodges, has returned an average of 26% annually over the past five years -- over 14 percentage points better than the S&P 500. Year to date the fund is only down 3.2%, compared with a 5% drop for the index.

Whether that's luck or skill, the pair has not had to look too far afield to find winners. Of the 75 stocks currently held in the $620 million fund, 21 are based in their home state of Texas, comprising 34% of the fund's holdings.

Neither father nor son will admit to seeking out companies specifically because they are located in their home state. But Craig Hodges does point out the Lone Star state's business advantages.

"Obviously, the energy business is booming, and that has always been central to the Texas economy," says Craig Hodges. "There is also an entrepreneurial spirit in Texas; no income tax, which helps draws talent; and the central location is great -- just three hours to both coasts."

Corporate America seems to agree. According to the latest Fortune magazine, more Fortune 500 companies are now headquartered in Texas than New York.

Hodges, a five-time Lipper award-winning fund, has done quite nicely owning a mixture of core growth, overlooked value and "super growth" stocks.

In the core growth category, Hodges holds Exxon MobilXOM, Johnson & JohnsonJNJ and deepwater driller TransoceanRIG.

"Transocean has tremendous pricing power, and there are certainly high barriers to entry in that business," says Craig Hodges. "Day rates are moving up and should continue to move up for quite a while. And those increases go right to the bottom line."

Somebody has to get workers onto those offshore oil rigs, and Hodges says that's where Houston-based Bristow GroupBRS comes in. Bristow provides helicopter transportation services to the offshore oil and gas industry, and he considers it an unheralded and overlooked player in the energy bonanza.

"Its almost impossible to get big helicopters nowadays because the government needs them for Iraq," says Hodges. "They already have them, so they are in a great position."

Another member of the fund's overlooked value camp is famed pen maker A.T. CrossATX, which also sells eyewear. Hodges says the company is a hidden gem with almost no Wall Street coverage, and should really pop now that it has lowered costs by moving production abroad.

The remaining piece of Hodges' pie is reserved for so-called super-growth, or rapidly growing, stocks like AppleAAPL.

Another super-growth holding, due to the commodity boom, is egg provider Cal-Maine FoodsCALM. The stock has run from $12 to $35 a share over the past year.

"Earnings are spectacular because egg prices have gone through the roof," says Hodges. "And while the stock has run up, it still trades at a low multiple of six times earnings."

Hodges warns that this stock is not for the faint of heart, since there are no real barriers to entry when it comes to producing eggs.

But then again, he's no chicken. He's from cattle country.