Hodges Capital Management

Broad Investment Strategy/Personalized Management/Tax Sensitivity

                Hodges Capital Management (HCM), Inc. manages more than half a billion dollars in separately managed accounts and mutual funds.   Based in Dallas, Texas, HCM manages customized portfolios for many high net worth individuals and is the advisor for the highly acclaimed Hodges Fund.  For 2005 and 2006, Lipper Inc. awarded The Hodges Fund “The Best Multi-Cap Core Fund” for its three-year risk-adjusted performance.

                HCM’s founder and chairman is Donald W. Hodges, who began his investment career in 1960 with Merrill Lynch.  In 1974, he joined what is now RBC Dain Rauscher, where he became president in 1983.  In 1989, Don and his son Craig Hodges founded HCM, where Don currently serves as chairman.   Craig Hodges, HCM president, entered the securities business in 1986 after graduating from Baylor University with a degree in finance.  In 1989, Craig started First Dallas Securities, where he became president in 2000. 

O             Our Investment Strategy

                Our strategy is to be open-minded to almost any U.S. stock that we think will make money for our clients.  We buy shares of U.S. companies regardless of their size or investment style.  It can be a blue chip stock or a small undiscovered issue.  It can be value or growth.

                Our belief is that when you become highly specialized, locked into one style or market cap, then you could have long periods where there is little or no performance.  We think the approach of being flexible helps you avoid those long lean periods where a style or market capitalization is out of favor.

O             Realizing Potential At Different Times

                When we construct a portfolio, we are assembling a core group of securities.  Not all of these companies will realize their potential at the same time. 

                We are aware that some stocks are going to pay off right away, some are going to provide performance in a year or so, others are going to move up in two or three years and still others may offer great potential but no current timetable for results. 

                Some portfolio managers expect every stock that they own to be moving up right now.  But it rarely works that way.  Our portfolios include companies that are likely to perform at different times. 

Minimize Risk/Reduce Taxes/Preserve Wealth

O             Decision Process

                Some investment firms rely heavily on computer models and large committees of portfolio managers before they make decisions.  Of course, we also use technology to do routine calculations but never to make decisions for us.  Instead, we take responsibility for all investment decisions, rather than relying on a large committee or bureaucracy.

O             Research

                At any one time, we are monitoring approximately 900 companies, performing fundamental analysis on a daily basis.  We will own shares of about 20-30 of those companies for our customized portfolios, depending on account size.

                We scrutinize a company’s long-term growth history and its stock price performance in good markets and bad markets.  We also look for expanding price/earnings ratios, strong brands, pricing power, good corporate governance and ethical management.  Companies with a lot of debt are usually avoided unless they have a plan to reduce the debt.  If there are negatives to a story, we might still buy the stock if we think the price is right.

                It is very important for us to meet with management, especially for the small-cap company that isn’t well covered on Wall Street.  We look management in the eye and make sure that we’re getting the straight story.  Every company has positives and negatives.  If management is straightforward about both sides of the story, and we still think the stock is a great buy, then we may go ahead and invest.  We won’t invest if management is glossing over reality.

O             Investing In Relevant Sectors

                Unlike many investment firms, we do not perform asset allocation.  That is, we do not feel compelled to invest in every industry or sector of the economy.  Instead, we want to invest in sectors that are relevant and benefit from current economic trends.           

                For example, although technology was a relevant sector in the late 1990s, tech has not generally flourished during the past several years.  One measure of relevance is pricing power.  Technology has not generally had pricing power, although this is starting to change.   If a company has the ability to raise prices in their markets, then their stocks usually do extremely well. 

                Examples of relevant sectors with pricing power include commodities, construction, energy, metals, railroads — even airlines, most recently.  Our job is to anticipate industries that will develop pricing power. 

Broad Investment Strategy                /Personalized Management/Tax Sensitivity

O             Purchase/Monitor

                Once we find an idea that looks intriguing, then we will delve into it and really look at it closely.  If we come to a conclusion that this stock is likely to go up in the next 18 months, then we’ll invest in it. 

                Companies have life cycles where business ebbs and flows, alternating from prosperity to retrenchment to renewed expansion. Just because a company’s stock has done well in the past does not necessarily mean that it will do well in the future, and vice versa. Our job is to discover, anticipate and react to those changes.

                How do we decide to buy and then continue to hold a stock?    Companies that have been successful for long periods of time and have gained wide acceptance by investors from all walks of life can be the most vulnerable to price declines. On the other hand, stocks with less-than-attractive images due to previous sub-par returns may, as a result of management changes and new opportunities, be compelling investments.

                Our focus is the company’s business cycle, not external economic cycles such as gross domestic product and interest rates.  Is the company coming out of a slump or going into one?  Has it been reorganized and have new management?

O             Sell Discipline

                As far as a sell discipline, we don’t have a rigid formula.  Generally, we become concerned if the stock’s price/earnings ratio is getting too lofty.  We will sell the stock if we think it’s overpriced and we become concerned about it dropping.  If we bought a stock for a particular reason, then we will sell the stock if it turns out that the reason we bought it isn’t materializing.

Minimize Risk/Reduce Taxes/Preserve Wealth

O             Customized Portfolios

Tell us your investment objective.  If you want to emphasize income, then we can customize a portfolio tailored to your needs.  Are you looking for tax-free income because you are in a high tax bracket? Or is taxable income appropriate? Do you want moderate growth or do you have the risk tolerance for aggressive growth? One size does not fit all.

                We don’t have “off the shelf” portfolios for income and growth.  Our portfolios are truly individually customized to meet your needs. 

O             Some Questions For You

                What is your risk tolerance?   

                 We may have investors whose goal is income rather than capital appreciation.   Within income, there may be shades of gray depending on a client’s risk tolerance.  For example, a 50-year old investor’s portfolio may look different than that of a 75-year old because the younger person has a longer time horizon.  Each may be conservative, but the older investor may be willing to take less risk.  In contrast, some investors who are willing to take on more risk, seek a blend of growth and income, while others purely seek capital appreciation.

                What is your tax situation?

                Since most of our accounts are taxable, we are very sensitive about minimizing taxes.  At the same time, we try not to let it dominate the investment process.  If it makes sense to hold an investment for a year to take advantage of the long-term capital gains rate of 15%, then we will certainly do so.   However, some aggressive investors would prefer to capture short-term gains, even though the tax rate is 35%. 

                Do you have concerns about certain industries?

                Some of our clients have other investments in a particular industry and prefer that we avoid those stocks for diversification purposes.  Occasionally, some have ethical concerns with certain companies, such as those that sell alcohol or tobacco.  We try to invest in companies that we would be proud to own.

                How often do you wish to hear from us?

                We meet quarterly with our clients – one on one.  It is the most effective method of communicating our performance and your progress.  We also send out monthly and quarterly statements.  In addition, we are available whenever you want to meet with us.   Call us anytime.                

The Hodges Capital Advantage

O             Customized Account Management

O             In-Depth Company Research

O             Decades of Market Experience

O             Flexibility To Invest In All Sectors

O             Ability To React Quickly