Why transportation stocks are a smart play now

A leading mutual fund manager sees an opportunity in transportation stocks right now.

Craig Hodges is president of Hodges Capital Management, and a portfolio manager of the Hodges Small Cap fund (HDPSX), which has outperformed all but one other general U.S. domestic stock fund over the past five years.

His funds have profited investing in airlines and other transportation stocks. Among his fund's top 10 holdings are American Airlines (AAL) and Spirit Airlines (SAVE), which releases earnings before Tuesday's open.

The airline business, says Hodges, has "finally become right-sized" and run "like a business." And he expects that shift is here to stay in part because barriers to entry to the airline business have become "so high."

In the meantime, airline stocks are relatively cheap, according to Hodges. "Most are trading at five to eight times earnings' because "the investing public is skeptical and that has created the opportunity."

The latest earnings reports from airlines support Hodges' confidence and not the skepticism of investors. American, JetBlue (JBLU), Delta (DAL) and United Continental (UAL) all beat analysts' expectations, and American and United also announced share buybacks of up to $1 billion each over the next two or three years, joining Delta and Southwest, which have already been buying back shares.

The only caveat Hodges sees for airline stocks: a big jump in energy prices.

With the exception of American Airlines , most major carriers have outperformed the S&P 500 (^GSPC) in the last week. All airline stocks have outperformed major stock indexes over the past year.

Related: Airline mergers are good for consumers, apparently

With regard to some of the tragic airline incidents and how they might affect sentiment about the industry overall, Hodges says flying is too important an industry to be greatly affected by the latest accidents.

"The airline business is too essential for what our economy has to do," he says.

Hodges adds: "These accidents may hurt booking for a little while, but statistics show that flying is the safer way to travel. This will blow over and a couple of years from now you will have looked back and you'll have made a really good money from this level."

Related: JetBlue introduces a premium class with lie-flat seating

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