These Funds Are on Fire

06/05/2013 9:45 am EST

Focus: FUNDS

These two are running ahead of the pack this year, and Walter Frank of the MoneyLetter analyzes their strategies to see what they're doing right.

Over the last two months, Hodges Fund (HDPMX) has made a strong run to the top echelons of our domestic stock fund rankings. And one of its siblings, Hodges Small Cap (HDPSX), has been within the top decline of the small blend category from 2009 through last year, and is in the top 20% this year.

The fund group has always emphasized bottom up, independent fundamental research, looking for earnings growth, good cash flow, low debt, and quality management.

Hodges Fund concentrates investments in its highest conviction stocks. It is a five-time Lipper award winner as best multi-cap fund for various time periods. However, fortunes reversed and the fund landed nearer the bottom of its category from 2008 through 2011. But the fund is back, with a category-topping return this year.

The fund is heavily overweight in the consumer cyclical, industrial, and real estate sectors. Its highest conviction stock is Texas Pacific Land Trust (TPL), which was set up in 1888 and owns nearly a million acres of land in West Texas. The fund is also benefiting from its airline holdings, notably Delta (DAL) and United Continental (UAL).

Hodges Small Cap is more diversified than the flagship Hodges fund. It sports overweights in consumer cyclical, energy, and industrials, and noticeable underweights in financials and health care.

Seriously contrarian picks have paid off for the fund, including Cinemark (CNK), a theater operator that Wall Street dismissed as a dying business, but which found growth in late America.

Similarly, the team purchased Krispy Kreme (KKD) when it was severely depressed. Again, expansion overseas benefited the stock price. Currently, its top holdings include US Airways (LCC), Geo Group (GEO), Trinity Industries (TRN), and Briggs & Stratton (BGG).

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