By David Randall
NEW YORK (Reuters) - A Texas-sized selloff of companies based in the Lone Star State is helping one small-cap fund manager produce outsized returns.
Craig Hodges, co-portfolio manager of the $6.2 million Hodges Pure Contrarian fund
Hodges is prospering mainly by buying Texas-based homebuilders, banks and hotel chains whose shares were caught up in the deep selloff in early 2016 triggered by fears that oil prices would dip into the $20 range. At one point, the large-cap benchmark Standard & Poor's 500 (SPX) was down 10.5 percent for the year to date; it is now flat on the year.
"You're seeing these algorithms sell anything based in Texas because they think it's all tied up to energy," said Hodges, who is based in Dallas. "I get questions from investors outside of the state about whether everyone is having to sell their house in Dallas, when Dallas housing is as strong as it's ever been."
Overall, Hodges now has about 40 percent of his fund in companies based in Texas, double the number from two years ago.
Few investors take such regional bets, though those that do often have a successful track record, said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
St. Paul, Minnesota-based firm Mairs & Power Inc, for example, only invests in companies based in the Upper Midwest. Its funds have finished in the top quartile of their peer groups over the last one, three and ten years, according to Lipper data. There are no exchange traded funds that only own companies based in a specific state.
The average Texas-based company on the New York Stock Exchange is down 2.2 percent for the year, compared with a 1.1 percent gain for all companies listed, according to Thomson Reuters data. The average Texas-based stock on the Nasdaq, meanwhile, is down 6.3 percent, compared with an average loss of 5 percent for all Nasdaq companies.
Hodges has been buying companies like hotel chain La Quinta Holdings Inc (N:LQ), country club owner ClubCorp Holdings Inc (N:MYCC), homebuilder LGI Homes Inc (O:LGIH) and regional bank Independent Bank Group Inc (O:IBTX), many of which are still down significantly this year.
La Quinta, for instance, is down 8 percent in 2016. Hodges began buying the company, which has approximately 25 percent of its hotels in Texas, when it dipped below $10 per share in early Feb. It now trades at approximately $12.50 per share. A similar buy-low strategy has worked for his ClubCorp purchase.
"It's become pretty opportunistic by this point," he said.