Beating the Street: How Hodges Capital Management Outperforms All Other Mutual Fund Managers

Wall Street Transcript

67 WALL STREET, New York - July 25, 2014 - The Wall Street Transcript has re-published its Investing in Dividend-Paying Companies and Other Strategies Report. This special feature contains expert industry commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Bottom-Up Stock Selection - Cyclical Sectors, Exposure to Emerging Markets - Large-Cap, Deep-Value - Value Oriented Strategy - High-Quality Companies - Value Investing, Deep Value - Longer-Term Investing

Companies include: Procter & Gamble Co. (PG), Johnson & Johnson (JNJ), General Electric Co. (GE), Cracker Barrel Old Country Sto (CBRL), Union Pacific Corp. (UNP), Boeing Co. (BA), Lockheed Martin Corporation (LMT), Duke Energy Corp. (DUK), Centerpoint Energy Inc. (CNP), Geo Group Inc. (GEO), Corrections Corp. of America (CXW), Marriott International, Inc. (MAR), Verizon Communications Inc. (VZ), AT&T, Inc. (T), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), International Business Machine (IBM), Microsoft Corporation (MSFT), Chevron Corp. (CVX), Exxon Mobil Corp. (XOM)

In the following excerpt from the Investing in Dividend-Paying Companies and Other Strategies Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Please begin with some background about Hodges Capital Management and then discuss specifically the firm's Equity Income Fund.

Mr. Bradshaw: We manage about $1 billion in our five mutual funds. Our flagship, Hodges Fund (HDPMX), was founded in 1992. In December 2007 we started the Hodges Small Cap Fund (HDPSX) and in September 2009, we simultaneously started three additional funds, the Hodges Equity Income Fund (HDPEX), the Hodges Blue Chip Fund (HDPBX) and the Hodges Pure Contrarian Fund (HDPCX), giving us a family of five funds in our Hodges Capital portfolio. We are virtually 100% domestic, buying the best companies, right here in the United States. We don't buy bonds to speak of. We are equity investors. We are pretty much bottom-up-oriented, looking at an individual company's cash flow and earnings. Although we certainly keep an eye on what's going on in the macro environment, we don't spend a tremendous amount of time there.

The Equity Income Fund is one of the newer funds. About 75% of the companies we select for this fund are going to be good, solid, blue-chip companies - the likes of Procter & Gamble (PG), Johnson & Johnson (JNJ) and General Electric (GE) - that year in and year out continue to not only pay a good dividend, but have growing cash flow, growing earnings, and they are raising their dividend each year. These aspects are what drive our process.

As a bonus we like to see them buying in shares as well. These are what I call the best companies in America, with the other 25% being companies that may not pay quite as large a dividend, but are growing earnings faster and raising their dividend at an accelerated rate. They may not even be large caps, like Cracker Barrel Old Country Store (CBRL) that's really growing earnings and raising their dividend at a pretty fast clip. Hopefully, that additional 25% or so of stocks will get us a little more growth in the portfolio, in addition to the income. The Hodges Equity Income portfolio is more of a focused portfolio. It's made up of anywhere from 40 to 45 different names. Today it has a 2.6% yield after all expenses, and is rated four-star by Morningstar.

TWST: Would you like to add to that any other criteria you focus on when evaluating individual investments?

Mr. Bradshaw: From a bottom-up approach, earnings is the key driver, of course. We want to see companies growing faster than their competition, taking market share, competing in areas where you have difficult barriers to entry, such as Union Pacific (UNP) in railroads or Boeing (BA) in aerospace. But again, the key driver is growing cash flow and earnings year over year.

TWST: How do you balance the desire for dividend income with other considerations, like capital preservation and appreciation?

Mr. Bradshaw: First and foremost, we're looking for total return...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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