Craig Hodges, the Dallas-based portfolio manager of the Hodges Fund (HDPMX), says two stocks owned by his fund make terrific substitutes for actual gifts this holiday season with potential upside over the near-term.
Chico's FAS (CHS) Holiday Gift Equivalent: One share of Chico's FAS can be bought for $12.29, while shoppers can select from a seemingly endless number of earring and bracelet designs that cost $13.99 or less. Hodges' Take: Chico's accounts for 2% of the Hodges Fund as of Sept. 30. While the return on the investment is minus 11% in 2010, Hodges is forecasting a rebound. "This is one that is in the middle of a resurgence. This is a fallen star and you don't hear about it as much, but they are slowly improving fundamentals under the radar. I think they can earn $1 a share next year, and the Street is looking at 82 cents a share. Chico's stock could trade in the upper-teens. While you wait, you can make a little money with a dividend. "It's a feast or famine in this business. If you're wrong, especially with women's apparel, you can get pounded. But they have ironed out their inventory situation and they take fewer risks than they used to. I don't know that it'll get hot like it did years ago, but you could see the stock in the $20s a couple of years out." With more than $325 million in total assets, the Hodges Fund has roughly 40 stock holdings of different market values that Hodges expects will help with a long-term growth strategy. Specifically, Hodges looks for domestic stocks that may currently be out of favor but appear to have turnaround potential. In addition to Sirius XM and Chico's, the fund has investments in Transocean (RIG), Wal-Mart (WMT) and Krispy Kreme Doughnuts (KKD). The Hodges Fund has performed well over the past year, beating the market by over 400 basis points, although the fund has a three-year annualized return of minus 12%. Looking at annual returns over the past few years, performance has been lumpy. The Hodges Fund returned 36% in 2009, 8.5% in 2007 and 18% in 2006. However, these gains were offset by a 50% dive in 2008. "We had a real rough 2008," Hodges says. "But in the 19 years we've been a fund, we've outperformed the market in 16 of those years."