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Small-cap manager Craig Hodges explains his company’s strategy for evaluating holdings during market downturns. He also tells Kate Stalter about two little-known stocks that he expects so show big gains going forward.

Kate Stalter: I’m speaking today with Craig Hodges of The Hodges Small Cap Fund (HDPSX).

Craig, I wanted to start out with some current events. This week, as we’re speaking, the market appears to be consolidating in recent sessions. Is that action that should worry investors, or do you see it as just a normal pullback after a healthy run-up?

Craig Hodges: I see it as a normal pullback. Actually, I see it as a very healthy thing for the market. Last year was filled with a lot of volatility, a lot of big down days—three in a row, that sort of thing—and this year we haven’t seen much of that since the markets started surging in October.

I think in 2012, we only had one or two days where the markets been down 100 points. And every time there is a sell-off, you see pretty good buying come in and absorb it and take the market right back up.

So, I think there are a lot of people that have missed this latest rally that are looking for an entry point, and so I view a 3% to 5% correction in the market as a healthy event. And I think there’s so much money on the sidelines that it’ll be absorbed pretty quickly.

Kate Stalter: Do you, as a fund manager, go in there at these pullbacks to support an existing position or get some more shares?

Craig Hodges: We do at some point. We look at every one of our holdings, and really are laser focused on what’s going on individually in that company.

I a stock starts to pull back, we will double check, check out and see what-all is going on in the company, see if we can find out if there’s a reason for the weakness. And if the thesis stays intact, we will use weakness to add to our position. We definitely use that strategy, that sort of thing.

There are occasions where something will change, or maybe your original thesis may be changing, and if that’s the case, that’ll raise a red flag. And we’ll assess it and maybe get out of a position if that’s the case.

Kate Stalter: Let’s talk specifically, then, about the space you’re in, the small-cap space. It’s an area that I follow closely, and I know that these stocks can often experience greater volatility than the broader market. How do you as a manager deal with that volatility?

Craig Hodges: Since we do it every day, it really doesn’t affect us like it does individual investors. Individual investors tend to get pretty upset when a stock they own will drop 10% or even 15%. But as a manager, that volatility sometimes can be an advantage.

Another thing: A lot of times, the best companies are the most volatile. So the ones that aren’t doing all that well, there’s not a whole lot happening at the company…those stocks don’t seem to do much. So, by nature, your best, fastest-growing companies are going to be the most volatile. So, we take that into account.

And we have a very long-term view at Hodges Capital. Like you stated, we use the volatility to take advantage of getting some better pricing, as far as our cost basis goes.

Kate Stalter: Craig, can you share a little bit about some of the positions you have right now, and maybe even talk both fundamentals and technicals, if you’re able to?

Craig Hodges: We’re bottom-up stock pickers, and so we really look for companies that may be bucking the trend even if the economy—we’re in a slow-growth environment—there are still a lot of small-cap stocks that are doing extremely well. So, you’ll see a lot of consumer discretionary stocks in our portfolios, kind of niche companies that are bucking the trend.

We also are real favorable on the energy space, and see a lot of opportunities there. There are a lot of industrial-type companies, small industrial companies that are doing well.

One company that I’m real excited about, it’s the most unique unusual company in the 27 years that I’ve been doing this, that we’ve ever come across. It’s a company called Texas Pacific Land Trust (TPL), and it’s just about one of the oldest companies on the New York Stock Exchange.

It’s a self-liquidating trust. The railroads, in the early 1900s, a lot of those went out of business. They set up this trust, and it’s a self-liquidating trust. And what is it? They own about 1 million acres of land in West Texas, a little under 1 million acres of land.


Tickers Mentioned: Tickers: HDPSX, ATW, TPL