Don't mess with Texas. Just buy their stocks instead. The Dallas-based ( HDPMX) Hodges Fund is up an impressive 15% year to date and more than 30% annually over the last five years. The fund's strategy is to invest in companies with improving earnings growth regardless of their size. That often means buying large blue-chip stocks or shares of small, emerging companies, as well as promising companies in between. One thing that stands out about the Hodges Fund -- aside from its remarkable returns -- is its preponderance of companies headquartered in the Lone Star state. "We don't actively target Texas-based companies for our fund," says Eric Marshall, the fund's director of research, in a
recent Street.com TV interview . "It just kind of happens that way." It's not pure serendipity. Marshall and the fund's portfolio managers, the father-son team of Don and Craig Hodges, constantly visit companies to check in with management. The ones in their back yard just tend to show up more on their radar. "We read about them in the local papers and see them on local television," says Marshall, who originally hails from Amarillo, and, like Don Hodges, is an alumnus of West Texas A&M University. "So if we are employing a modified Peter Lynch approach, it makes things a bit easier." For example, the fund owns shares of Fort Worth-based electrical products maker and galvanizing services provider AZZ ( AZZ). Marshall says the company, whose shares are up 39% year to date and recently increased its 2008 outlook on the heels of a solid second quarter, is benefiting from the upgrades to the nation's oil refineries and ethanol plants. They are also one of the few domestic companies in the European-dominated business of selling transmission systems to utilities.
A better-known Hodges holding is Burlington Northern Santa Fe ( BNI), another Fort Worth company. The once-sleepy railroad stock gained in notoriety after Warren Buffett grabbed a stake for Berkshire Hathaway ( BRKA). The Hodges Fund, however, has been in the name for a few years now and still likes "the secular story of rail transport as a low-cost transportation provider." "We started buying the stock in the low $30s, which is well before Warren Buffett and Berkshire got in," says Marshall. "But his purchases reassured us that our thesis was still on track." Commercial Metals ( CMC) may be based in Irving, Texas, but Marshall says the steelmaker and scrap recycler's growing Eastern European business is what appeals to him. "Commercial Metals bought a mill in Poland back during its privatization period," says Marshall. "They were starved for capex, so they came in and improved the output. Now they are doing the same thing in Croatia." And what about Texas tea? Where do oil stocks fit into the Hodges fund? "We do own a lot of energy companies in our portfolio and they have certainly helped our performance," says Marshall. "But Texas is a diversified economy. We also have huge telecom, infrastructure and transportation companies down here as well." Maybe it's true. Everything is bigger in Texas.