DALLAS (TheStreet) --Eric Marshall, co-manager of the Hodges Small Cap Fund (HDPSX) - Get Report, 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
peers. Over past year, the Hodges Small Cap fund is up 64%, better than 92% of its rivals.
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?
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?
My top stock pick is
. 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.
What is your top "beneath the radar" stock pick?
Our best sleeper stock pick is
, which makes roadside mowing equipment and other specialty equipment products that are used by government entities and contractors for maintenance.
A couple of weeks ago, Alamo reported better-than-expected third-quarter earnings. Sales fell 26% to $110 million from $149 million a year ago, which actually compares favorably to the recent results from other large equipment manufactures. Earnings amounted to 46 cents per share vs. 45 cents a year ago and a consensus estimate of 29 cents per share. The impressive earnings improvement in the quarter was the result of better margins from expense controls despite several charges related to the Bush Hog acquisition.This put earnings for the first nine months of the year at 91 cents per share.
Debt has been reduced from $91.5 million a year ago to $62.9 million at the end of the quarter. Alamo is seeing signs of the market bottoming out and expects a gradual rebound in sales. Under normal economic conditions, we believe the company has the potential to achieve a 10% operating margin on $650 million of revenue, which translates into peak earnings power of $3 per share.
What is your favorite sector?
In the Hodges Small Cap Fund, we are currently overweight consumer and business services and energy companies, but we are focusing on the individual stocks that have the staying power to come out of the current downturn in better competitive positions than they may have had prior to the economic downturn. Such companies typically have strong balance sheets and access to capital, low-cost production relative to those of peers, high barriers to entry, ability to quickly leverage fixed costs once incremental demand returns and exposure to new or emerging markets.
What sector would are you avoiding?
We are underweight telecommunications and utilities. We are avoiding companies that have overleveraged balance sheets or business models that require new capital on an ongoing basis.
Reported by Gregg Greenberg in New York
Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.