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Select oil and energy stocks as well as some niche retailers are undervalued despite their strong fundamentals, says Craig Hodges, who identifies several solid stock buys for late 2012.

My guest today is Craig Hodges.  He is here to talk about areas, sectors, and stocks that are of interest to him right now.  So Craig, let’s get right to it. What are you liking right now?

At the Hodges Fund (HDPMX) and at the Hodges Small Cap Fund (HDPSX), we particularly think that the energy area has a lot of promise.  We like energy, we like some selective specialty retail, and also some industrials.  In the energy area, probably our favorite area would be the deepwater drillers. 

There is a company called Atwood Oceanics (ATW) that’s a deepwater driller, and that’s an area of the energy business that has the highest barriers of entry. So it’s hard to get into that business.  It takes five to seven years to build a deepwater rig, and half a billion dollars to do it. So there are not a lot of people flooding in, and that’s where your big oil deposits are going to be found in the next ten years.  So these companies like Atwood are going to have good pricing power for the next few years, and you’re going to see those day rates go up as oil continues to go up.  So that’s the part of the energy business that I think is probably the most attractive. 

We also see some selective oil companies like SandRidge (SD), and some that have been knocked down real hard, who I think have got a lot of promise as well. 

Is the investor memory of the Deepwater Horizon issue still playing into effect in that industry?

Yes, that’s why they’re very under-loved. Because of that and the thought of there being a bunch of regulation that would go in and prevent those companies from doing well—and there has been some regulation, but it’s starting to go back the other way now where they’re getting more permits—and that’s kept a lot of people out of the business. So I think that, like I was talking about, helped the day rates go up, which should increase profits.  Kind of like Atwood—that’s trading around $39—will probably earn $5 a share this next year.  So it trades at a very low price. 

And how about the retail?  What was there that was attractive?

Especially retail.  You know, I don’t think the general retail environment is all that healthy, but we found some select companies at the Hodges Small Cap Fund.  There is a company like Oxford Industries (OXM).  Oxford is not a well-known name, but they have Tommy Bahama as a clothing line and another clothing line named Lilly Pulitzer.  That company seems to be bucking the trend. 

There are even things like a company like Krispy Kreme (KKD), which used to be a hot stock, but it’s gotten down to like a couple dollars a share.  They’ve rebuilt that name, and they’re starting to grow again. 

And with these lower oil prices, I even think restaurants can do well.  Cracker Barrel Old Country Store (CBRL) is a restaurant store that we’re buying now, and with lower oil prices it’s going to give everyone a little bit more money in their pocket, which should help them to go out and dine.

When I think of restaurants, I think of an improving economy.  Is that your feeling?

Long term it is.  I think, you know, there is so much negativity and uncertainty still out there that I think the business environment probably through the rest of the year is going to be pretty tough. But I think once some of these issues are not as prevalent, I think we’re setting up for a real nice advance forward probably here later in the year.

Craig, thanks for your time.

My pleasure.