Don't mess with Texas.

A slogan that started as an expression of state pride and then became an

antilitter campaign can help you shape your portfolio, believe it or not.

President Bush's re-election last week showed that the concept applies handily to politics, for instance. And the long-lived success of the Dallas-based

(HDPMX) - Get Report

Hodges fund makes it hard to overlook the merits of investing in the Lone Star state.

Of course, taking financial advice from a bumper sticker is rarely prudent. But fund manager Don Hodges has beaten the market over the space of a decade, and nearly a third of the 60-plus companies in his portfolio are based in the Lone Star state.

Hodges' fund has thrived using a three-part strategy that mixes core growth companies -- household names like

Home Depot

(HD) - Get Report

and

E*Trade

(ET) - Get Report

-- with turnaround candidates such as Texas restaurant chain

Luby's

(LUB) - Get Report

and momentum stocks like

XM Satellite Radio

( XMSR).

Texas-based companies, meanwhile, have been some of the fund's biggest winners. They range from real estate play

Texas Pacific Land Trust

(TPL) - Get Report

and retailer

Neiman-Marcus

(NMGA)

to railroad

Burlington Northern Santa Fe

( BNI). As you can see, the fund -- like the state -- isn't just about the oil industry.

The fund has run up an impressive 10-year annualized return of 11.9%. That's nearly a full percentage point better than the

S&P 500

over the same period. This year, the index is up 8.8%, handily beating the S&P once again.

TheStreet.com

sat down with Hodges recently to seek out more values deep in the heart of you-know-where.

TSC

:

What is it about Texas that makes you invest there?

Hodges

: Frankly, I view Texas businessmen as being very aggressive from a marketing and risk-taking standpoint, but somewhat conservative financially. And that's a good combination. They are entrepreneurial and have what we in Texas call horse sense.

Texas Pacific Land Trust isn't a name you hear too much on Wall Street. But judging from the chart, a lot of investors up here might wish they had discovered it a long time ago. How did you hear about this stock?

Texas Pacific Land Trust is actually one of the oldest stocks on the Exchange. It came out of the Texas Pacific Railroad, which went bankrupt. They own land all over Texas that had originally been given to the railroad in order to get them to put a rail through the state. When they went bankrupt they took all that land and put it in a trust to pay off the creditors, and that trust has existed all of these years.

They are passive, but they occasionally sell off land and use those proceeds to pay a dividend and buy back shares. There are still over a million acres of land in that trust, and they have no overhead except seven employees. They also collect oil royalties from the 2,800 oil and gas wells on their properties.

You also own another railroad, Burlington Northern, which still ships freight across the country. Why did you pick this one up?

I first noticed the company when I heard their trains were moving more frequently through the little community in Texas where I grew up. Then I learned the company had notified the city about putting a double track through it and adding an overpass. The company said to be prepared for a train every 18 minutes. I know that's way above the normal rate, so I started getting interested in the railroad business.

A friend of mine has a grain elevator in a little community and the railroad couldn't provide him with enough grain cars to move his grain. There was too much demand for railroad cars. So I began to do more research and I found out that the new container ships from China are too large to go through the Panama Canal. So anything that's headed for the East Coast is going to come into Long Beach or Los Angeles and be put on a train. And many railroads like Burlington are seeing their volume and earnings begin to pick up because of it.

Does this carry over to the truckers too?

Absolutely. The trucking business was terrible for a long time and a lot of small truckers that owned two or three trucks went out of business. We also saw a lot of mergers in the industry. Then all of a sudden, demand exceeds supply. There's a shortage of truck drivers. There is a shortage of trucks. They are able to pass the fuel charges on to their customers as a surcharge, so in spite of the rise in fuel prices the truckers are doing very well.

Any truckers in particular that you like?

Yellow Roadway

( YELL) is one that is doing well. I think they will earn close to $4 a share this year -- and probably $5 next year -- and maintain a low P/E multiple. I remember in the 1960s when both Yellow and Roadway sold at high multiples because they had such huge growth rates. Now the combined company is trading at a multiple of less than 11 because they are out of favor. This is also a stock that is underowned by institutions.

I also see you own a Texas-based trucker named Frozen Food Express Industries( FFEX). Is that the same story?

That's a case of following a stock for 15 or 20 years and being disappointed for many of them. There was always something that was not working. Then all of a sudden they were hit by the perfect storm. Three or four of their big competitors went out of business two years ago. So they have pricing power now. They are the largest transporter of things that have to be refrigerated like food and drugs.

What else is big in Texas?

Luby's is a Texas-based restaurant chain I have held for a long time. I've always been partial to restaurant stocks. I started buying them in the mid 1960's when

McDonald's

(MCD) - Get Report

came public. Restaurants have probably been the most profitable group that I have ever invested in. So I know quite a bit about the players in that business.

Luby's was a great stock many years ago -- they paid a dividend and had no debt. Then management made some classic mistakes by expanding too quickly, and it started losing money. It was mismanaged for years until a couple of fellows in Texas named the Pappas brothers took it over about three years ago. And they have done an excellent job of running it ever since. I just kept loading up on it -- even when it dipped -- based on their management skills. They have cut the debt and turned this thing around.

People usually think about oil when they think of Texas, and you are talking about restaurants, railroads and real estate. Is oil still king in the Lone Star state, or is that perception out of date?

The state is not entirely dependent on energy any longer. For example, we have a lot of high tech companies in Texas. Oil is still a pretty big factor in the economy of Houston, but in places like Dallas and elsewhere I don't think it is that central anymore.

Your investing style seems to rely on a lot of Peter Lynch-type observations.

I learned a long time ago that you can find great companies if you are observant. If you take note of which parking lots are full, then supplement that knowledge with some financial research, then you can make some great stock picks.

Another stock you own is Rocky Mountain Chocolate Factory(RMCF) - Get Report. Why did you leave Texas to get involved with a Colorado-based candy retailer?

I got a research report on that one from an entrepreneurial young fellow. Then I did some research myself and visited their stores to understand their business model. I could see it was a growth stock, but what was interesting was that it was also a dividend-paying stock, which you seldom see in small companies.

They don't have major capital requirements because their franchisees put up the money to build their stores. They decided over a year ago to pay out about half their earnings in a dividend. In the first year of this strategy they paid out about 24 cents. A couple of months ago they announced the dividend would go to 32 cents. I think next year it could go to 42 cents. Well, for a little $13 stock, that's a pretty nice dividend. Plus you are hopefully getting some capital appreciation too.

From your vantage point in the middle of the country, what does the economy look like?

I think we are in the middle of a slow, spotty recovery. However, as long as I have been in this business, I have never experienced a time when there has not been at least one area of the market doing well. Even when things are down, some company or some industry will be prospering. So there is always a buyer's market somewhere -- if you pick up enough stones and look.