Hodges Small Cap Fund Finds Value in Niches

DALLAS (TheStreet) -- Eric Marshall, co-manager of the Hodges Small Cap Fund(HDPSX), has become more cautious as stocks have rebounded from their lows. He's targeting niches, such as shipping and lawn equipment.

The fund has risen 41% this year, better than 91% of its Morningstar(MORN) peers. Over past year, the Hodges Small Cap fund is up 64%, better than 92% of its rivals.

Welcome to TheStreet.com's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks in five fast and furious questions.

Are you bullish or bearish on the stock market?

Marshall: We are more cautious short-term than we were six months ago, but we remain bullish longer-term. We believe this environment will place a greater emphasis on individual stock selection and at the Hodges funds, we are working hard to find attractive opportunities.

What is your top stock pick?

Marshall: My top stock pick is Kirby(KEX). Kirby is well positioned as the largest U.S. inland barge operator. Although business has been challenging, Kirby has positioned itself to emerge from the current downturn in a strong competitive position.

Its key competitive advantages include an underleveraged balance sheet, low costs due to economies of scale, high efficiency rates, a broad offering of services and a fleet with a lower average age. The company has 80% of revenues under contract, which reduces cash flow volatility. It's also the sole barge operator with an investment-grade credit rating

Kirby benefits from a weak dollar. Sixty-six percent of its business is tied to the petrochemical industry. Lower capital expenditure plans in fiscal year 2010 will likely boost free cash flow with or without an economic recovery. And lastly, instead of ordering new barges, Kirby plans to take advantage of acquisition opportunities during the economic downturn.