“Good times or bad, markets are the place to look for clues to the future.”
– Robert M. Bleiberg
Average Annualized Returns
|(%) for Retail Class Shares as of 12/31/2016||QTD||1 YR*||3 YR*||5 YR*||10 YR*||SI*||Inception||Gross||Net|
|Small Cap Fund (HDPSX)||11.47||16.18||3.98||14.58||--||10.14||12/18/07||1.30||--|
|Hodges Fund (HDPMX)||10.29||39.78||9.91||19.37||6.61||10.46||10/09/92||1.32||--|
|Small Intrinsic Value Fund (HDSVX)||13.26||19.76||9.99||--||--||9.83||12/26/13||1.43||1.31**|
|Russell 2000 Value||14.07||31.74||8.31||--||--||8.30|
|Small-Mid Cap Fund (HDSMX)||14.55||21.62||8.72||--||--||8.79||12/26/13||1.79||1.41**|
|Pure Contrarian Fund (HDPCX)||9.17||70.51||1.00||13.50||--||9.75||09/10/09||2.48||1.41**|
|Blue Chip Equity Fund (HDPBX)||5.50||5.74||4.95||12.80||--||10.33||09/10/09||1.73||1.30**|
* Average Annualized
** The Advisor has contractually agreed to reduce its fees and/or pay Fund expenses until at least July 31, 2017. This figure excludes Acquired Fund Fees and Expenses, interest, taxes and extraordinary expenses.
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance of the funds may be lower or higher than the performance quoted. Performance data current to the most recent
While every year seems to be remarkable in its own way, 2016 felt like an unprecedented year for U.S. stocks, as the S&P 500 experienced one of its worst starts in several decades only to end the year with a gain of 11.96%. Gains in most major U.S. stock indices were accompanied by a dramatic reversal in investor sentiment, which changed from an overwhelming negative view on economic growth and political upheaval around the world to a more constructive stance on the earnings and regulatory environment for most domestic businesses. The presidential election seemed to supercharge this shift in sentiment, as the hope that a new administration in Washington might usher in a more business-friendly tax, and regulatory environment. As the prospects for significant earnings improvement in 2017 appears likely for many U.S. companies, we see value and growth opportunities in many of the cyclical areas of the market such as financials, consumer discretionary, technology, and industrials, whose earnings have been stagnant over the past couple of years due to sluggish growth in the U.S. economy. By contrast, we see less long-term opportunities in utilities, telecom, and consumer staples which had benefited the most from low interest rates and a flight to safety in recent years.
Although the coming structural changes to the business landscape in the U.S. are difficult to ignore, we are also not attempting to forecast or market time interest rates, currency fluctuations, or commodity prices. Instead, we believe 2017 will be an ideal time to scrutinize the fundamentals of individual companies. Although not true for every company, we see many of the headwinds for earnings of the past two years subsiding as input costs stabilize and consumption improves. Corporate tax reform could also boost profits, as well as increase capital investment in all sizes of businesses. As always, we are making a conscious effort to remain objective and open-minded in our buy and sell decisions, while continuously looking for new opportunities around every corner. Furthermore, we believe that there are many high quality companies running great businesses with excellent management teams that are still trading at bargain prices. Despite the rally in the second half of 2016, we still find U.S. equity valuations attractive with the S&P 500 trading at 16.9X forward earnings estimates according to FactSet. The inverse of this multiple is an earnings yield around 5.92%, compared to the 10-year treasury yield of 2.44% at year end. We believe this risk premium indicates that the potential reward for holding stocks outweighs the underlying downside risk.
The research team at Hodges Capital Management has continued to rigorously gather and analyze firsthand information from a broad scope of publicly traded companies, which involved making more than 2,500 contacts across more that 1,000 management teams during 2016. Here are a few worthwhile observations. First, most management teams seem more optimistic regarding the prospects for demand growth, pricing power, potential margin improvement and earnings growth in the next year compared to a year ago. Second, balance sheets are generally in good shape, allowing many corporations to continue to reinvest in capital projects, make strategic acquisitions, buy back shares and pay dividends. While we invest in individual companies, not stock markets, we can’t help but to point out that most individual and institutional investors still remain underweight equities following a prolonged period of outflows from domestic equity funds. As this trend has the potential to reverse itself in the year ahead, we see further gains in the market being supported by earnings growth and stable price/earnings multiples for most of the economically sensitive sectors of the market. While not every facet of the U.S. economy appears rosy, and companies with foreign exposure may face pressure due to protectionist rhetoric in the coming months, we maintain that current conditions provide no shortage of individual stocks with good potential relative to their underlying risk.
While we are clearly encouraged with the opportunities in the year ahead, we know 2017 will not be without its own unique challenges, and would not be surprised to see volatility return at some point during the year. In the midst of such volatility, we have historically found bargains as we are rigorously look for investments in well-run businesses that control their own destiny by relying on ingenuity and well-calculated business decisions. Although the macro conditions impacting the market can seem overwhelming at times, we always fall back to the idea that the long-term performance of stock prices is determined by the future earnings and cash flows of each underlying business. Stock prices over the long run are not a function of news headlines or 140-character tweets. Instead, we believe earnings power and prevailing interest rates are more important to long-term stock prices than political noise or monthly economic survey statistics. In conclusion, we see 2017 as an ideal environment for active portfolio managers to carefully select individual stocks that can generate long-term value for shareholders.
Hodges Small Cap Fund (HDPSX)
During the final quarter of 2016, the Hodges Small Cap Fund experienced a return of 11.47% versus 8.83% for the Russell 2000 Index. Positive relative performance in the most recent quarter reflected strength in many of the Fund’s cyclical, financial and material related stocks. However, the Fund lagged for the full calendar year end December 31, 2016, generating a return of 16.18% compared to 21.31% for the Russell 2000 Index. Disappointing relative performance also reflects the fund’s overweight exposure to consumer discretionary stocks that underperformed the Russell 2000.
The Hodges Small Cap Fund remains well diversified across industrials, transportation, financial services, technology, and consumer-related names, which we expect could contribute to the Fund's long-term performance. The Fund has recently taken profits in several stocks that appeared fairly valued relative to their underlying fundamentals, and established several new positions in stocks that we view as having an attractive risk/reward profile. The total number of stocks held in the Fund at the end of the year was 66 compared to 82 at the beginning of this year. Top ten holdings at the end of the quarter represented 28.0% of the Fund's holdings and included RSP Permian (RSPP), Texas Pacific Land Trust (TPL), JetBlue Airways (JBLU), Hilltop Holding (HTH), U.S. Concrete (USCR), Kapstone Paper & Packaging (KS), LegacyTexas Financial Group (LTXB), Casey's General Stores Inc. (CASY), JC Penney Inc. (JCP), and Brunswick Corp. (BC).
While the nature of small cap investing can provide opportunities for active portfolio management in just about any type of market, we view the current environment as an advantageous period for active stock picking within the small cap segment of the market. Small caps (as measured by the Russell 2000) outperformed the broader market (as measured by the S&P 500) in 2016, experiencing gains of 21.31% and 11.96% respectively. Moreover, we expect small cap investing to require a greater degree of individual stock selection and are now focusing on a number of areas within the small cap universe that in many cases are underfollowed or ignored by larger institutional investors. In the current environment, we expect merger activity to pick up as larger companies seek to grow by acquiring smaller businesses that can complement or expand their addressable markets. Small caps may also be in the best position to benefit from corporate tax reform as they tend to have more simplistic capital structures and exposure to the domestic economy. For the most part, we expect these factors to support valuation multiples for small cap stocks.
As of 12/31/2016
Hodges Small Cap Fund vs Russell 2000
Inception: 12-18-2007 Annualized
Hodges Fund (HDPMX)
The Hodges Fund's third quarter 2016 return was 10.29% compared to a gain of 3.82% for the S&P 500 Index. Positive relative performance in the recent quarter was attributed to individual stock selection. The Fund finished the full year up 39.78% in 2016 compared to a gain of 11.96% for the S&P 500 Index. Despite the headwinds surrounding many economically sensitive areas of the market, several of the Fund’s energy, technology, and material stocks experienced significant moves higher during 2016, which included a 127.10% move in the Fund’s largest holding, Texas Pacific Land Trust (TPL) and a 319.60% increase in the shares of United States Steel (X).
The Hodges Fund remains focused on investments where we have the highest conviction. The number of positions held in the Fund at the end of the recent quarter was 62. During the final calendar quarter of 2016, we took profits in a few stocks that appeared to offer less additional upside potential relative to their downside risk, increased the size of several positions in which we remain convicted, and entered into several new positions. For example, the Hodges Fund harvested a portion of our profits in AH Belo Corp. (AHC) and CF Industries (CF), while adding to or entering into new positions such as cosmetic maker, E.L.F. Beauty (ELF), and water infrastructure pipe manufacture, Forterra (FRTA). The top ten holdings at the end of the quarter included Texas Pacific Land Trust (TPL), Matador Resources (MTDR), Ring Energy (REI), Adidas
As of 12/31/2016
Hodges Fund vs S&P 500
Inception: 10-09-1992 Annualized
Hodges Blue Chip Equity Income Fund (HDPBX)
The Hodges Blue Chip Equity Income Fund experienced a gain of 5.50% in the fourth quarter of 2016 compared to a gain of 3.83% for the Russell 1000 Index. For the year, the fund gained 5.74% compared to a 12.05% return for the Russell 1000 Index. Lagging performance relative to the benchmark in 2016 reflected weakness among several of the Fund’s high quality consumer discretionary stocks, such as Tractor Supply Company (TSCO), as well as disappointing performance from several healthcare names such as Gilead Sciences (GILD). Although we were disappointed with the Fund’s relative performance in the recent quarter, we are finding plenty of attractive high quality dividend-paying stocks that may offer upside in addition to dividend income as stable corporate profits support the ability of companies to pay out dividends. The Blue Chip Equity Income portfolio remains well diversified in companies that we believe can generate above average income and total returns on a risk adjusted basis. Top ten holdings at the end of the quarter represented 41.4% of the Fund's holdings and included The Home Depot, Inc. (HD), Microsoft Corporation (MSFT), Facebook (FB), General Electric Company (GE), Royal Caribbean Cruise Lines (RCL), Apple (AAPL), AbbVie (AABV), Johnson & Johnson (JNJ), EnLink Midstream (ENLC), and Costco Wholesale Corp. (COST).
As of 12/31/2016
Hodges Blue Chip Equity Income Fund vs S&P 500
Inception: 09-10-2009 Annualized
Hodges Pure Contrarian Fund (HDPCX)
The Pure Contrarian Fund stands out as our best performing fund in 2016. The Fund experienced a gain of 9.17% in the recent quarter, which handily beat the 3.82% gain for the S&P 500 Index over the same period. For the entire year, the Fund was up 70.51% compared to a return of 11.96% for the S&P 500 Index. Extraordinary performance over the past twelve months has been largely attributed to significant improvement among several out-of-favor names, many of which are highly sensitive to commodity prices. The two largest contributors to the fund in 2016 were Cliffs Natural Resources (CLF) and
Short term performance, particular, is not a good indication of a fund’s future performance, and an investment should not be made based solely on returns.
Although timing a recovery in contrarian stocks can be tricky over short periods of time, we believe this strategy could be rewarding over a long investment horizon. We also expect this strategy to be less correlated with the broader market due to the general nature of contrarian investing. During the recent quarter, we continued to position the Fund in out-of-favor investment opportunities that we believe offer the best upside relative to their downside potential. Top ten holdings included Controladora Volaris (VLRS), LSB Industries (LXU), Comstock Resources (CRK), United States Steel (X), Lonestar Resources (LONE), Cliffs Natural Resources (CLF), Mylan (MYL), Southwest Energy (SWN), Luby’s (LUB), and Cemex (CX). The top 10 stocks in the Fund at the end of the quarter represented 38.7% of the Fund's holdings.
As of 12/31/2016
Hodges Pure Contrarian Fund vs S&P 500
Inception: 09-10-2009 Annualized
Hodges Small-Mid Cap Fund (HDSMX)
For the fourth quarter of 2016, the Hodges Small-Mid Cap Fund experienced a return of 14.55% compared to a gain of 6.12% for the Russell 2500. For the full year, the Fund experienced a return of 21.62% compared to a gain of 17.59% for the Russell 2500. The Fund’s favorable relative performance was attributed to a handful of energy and industrial stocks, such as WPX Energy (WPX) and Eagle materials (EXP). Top ten holdings at the end of the year represented 39.93% of the Fund's holdings and included VeritexHolding (VBTX), WPX Energy (WPX), Lonestar Resources (LONE),
As of 12/31/2016
Hodges Small-Mid Fund vs. Russell 2500
Inception: 12-26-2013 Annualized
Hodges Small Intrinsic Value Fund (HDSVX)
The Hodges Small Intrinsic Value Fund experienced a gain of 13.26% in the December quarter of 2016 compared to a gain of 14.07% for its benchmark, the Russell 2000 Value Index. The full year return amounted to 19.76% compared to a 31.74% return of the Russell 2000 Value. The Fund’s lagging relative performance in the recent quarter and year was largely attributed to the Fund’s underweighted exposure of 16.5% to financials, which comprised 29.5% of the Russell 2000 Value Index at year end and were the strongest contributor to performance for both the quarter and the year. The top ten holdings at year end represented 28.28% of the Fund's holdings and included Triumph Bancorp (TBK), Forterra (FRTA), Sportsman’s Warehouse (SPWH), Dycom Industries (DY), Hilltop Holdings Inc. (HTH), Cypress Semiconductor (CY), G-III Apparel Group (GIII), Veritex Holding (VBTX), Blue Bird (BLBD), and Tower Semiconductor (TSEM).
As of 12/31/2016
Hodges Small Intrinsic Value Fund vs Russell 2000
Inception: 12-26-2013 Annualized
In conclusion, we remain encouraged by the long-term investment opportunities surrounding the Hodges Mutual Funds. By offering six distinct mutual fund strategies that cover most major segments of the domestic equity market, we have the opportunity to serve the diverse needs of most financial advisors and individual investors. Our entire investment team of portfolio managers, analysts, and traders are working diligently by studying companies, meeting with management teams, observing trends, and attempting to navigate today's volatile financial markets. Feel free to contact us directly if we can address any specific questions.
The above discussion is based on the opinions of Eric Marshall, CFA, and is subject to change. It is not intended to be a forecast of future events, a guarantee of future results, and is not a recommendation to buy or sell any security. Portfolio composition and company ownership in the Hodges Funds are subject to daily change.
Mutual fund investing involves risk. Principal loss is possible. Investments in foreign securities involve greater volatility and political, economic and currency risks and differences in accounting methods. These risks are greater for investments in emerging markets. Options and future contracts have the risks of unlimited losses of the underlying holdings due to unanticipated market movements and failure to correctly predict the direction of securities prices, interest rates and currency exchange rates. These risks may be greater than risks associated with more traditional investments. Short sales of securities involve the risk that losses may exceed the original amount invested. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer term debt securities. Investments in small and medium capitalization companies involve additional risks such as limited liquidity and greater volatility. Funds that are non-diversified are more exposed to individual stock volatility than a diversified fund. Investments in companies that demonstrate special situations or turnarounds, meaning companies that have experienced significant business problems but are believed to have favorable prospects for recovery, involve greater risk.
Value investing carries the risk that the market will not recognize a security’s inherent value for a long time, or that a stock judged to be undervalued may actually be appropriately priced or overvalued.
Diversification does not assure a profit or protect against a loss in a declining market.
Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.
Investment performance reflects fee waivers in effect. In the absence of such waivers, total return would be reduced.
The S&P 500 Index is a broad based unmanaged index of 500 stocks that is widely recognized as representative of the equity market in general. The Russell 1000 Index is a subset of the Russell 3000 Index and consists of the 1,000 largest companies comprising over 90% of the total market capitalization of all listed stocks. The Russell 2000 Index consists of the smallest 2,000 companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as ranked by market capitalization. The Russell 2500 Index consists of the smallest 2,500 companies in a group of 3,000 U.S. companies in the Russell 3000 Index, as ranked by market capitalization. The Russell 3000 Index is a stock index consisting of the 3000 largest publically listed companies, representing about 98% of the total capitalization of the entire U.S. stock market. You cannot invest directly in an index. The Russell 2000 Value Index measures the performance of small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. The Russell 2000 Value Index is constructed to provide a comprehensive and unbiased barometer for the small-cap value segment. The Index is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set and that the represented companies continue to reflect value characteristics. It is not possible to invest directly in an index.
Cash Flow: A revenue or expense stream that changes a cash account over a given period.
Correlation: To have a mutual or reciprocal relation.
Earnings Growth is not a measure of the Fund’s future performance.
Forward Earnings Yield: The same earnings per share for the projected 12-month period divided by the current market price per share.