You may have heard the billions of dollars pulled from the stock market following 2008 are finding their way back. Investors may be more cautious this time around but they realize bonds and real estate aren’t offering the same rewards relative to risk that stocks can. A rapidly improving economy fueled by promising housing and auto numbers and low interest rates is only helping spur the return. But where do investors trust their money? Hodges is sure the answer is in dividend Blue Chips.
Hodges Portfolio Manager Gary Bradshaw spoke with Kapitall to discuss what he believes are the most interesting and promising stocks in the Hodges Equity Income Fund (HDPEX) portfolio.
With a stock picking focus on dividend income and long-term capital appreciation, the 4-star rated fund has done well. As of 3/1/13, Hodges Equity Income Fund is up 8.94% YTD, beating the S&P 500 by 2.8%. Of the 1,300+ funds in the US Large Value category, HDPEX currently ranks #6 YTD and #3 over 1 Month, and #12 over 3 years (annualized returns). “We eat our own cooking, and it’s been good cooking,” says Bradshaw, referring to Hodges fund managers who all invest in the fund along with their clients. “We’re bullish on the market this year and we think investors will be rewarded.”
Notable Stock Picks – A Case for Blue Chips
Blue Chips aren’t sexy companies by any means, but Bradshaw believes the market ignored many of these stocks over the last 10-15 years, and that’s ready to change as skittish investors put their money back into the market. Here are some of his favorite stock picks:
Johnson & Johnson (JNJ): “This is the kind of stock we’re looking for,” says Bradshaw. “You may say, ‘Gary, it hasn’t done anything in 12 years, it’s just siting there!’ Yes, BUT, it has grown earnings year over year and raised dividend for 50+ years, offering more than a 3% yield today. And yes, they have had product issues (recalls, etc), but they’ve got that behind them, as well as a new CEO, and we think JNJ is ready to move up. “
Sure enough, the company is hitting new 52-highs regularly. But don’t let the lost-rally discourage you, Gary says, “We think it’s poised to grow from here. It trades at a low multiple, 13x earnings, and in years past it’s always traded at a premium multiple."
Home Depot (HD): “This stock is our play on housing. We have all these foreclosed properties out there, and people are buying them and fixing them up. Home Depot is really benefiting form early stages of housing improvement and foreclosures. Plus, throw in Hurricane Sandy and all the tornadoes and you’ll see there are a lot of repairs that need to be taken place all over this country. It doesn’t have a very big yield – 1.72% – but they raised it 12% last year."
Shares are trading close to its 52-week high but Hodges thinks earnings are excelling. “Even though to trades at a premium multiple, we think the backdrop is good for more growth.”
Proctor and Gamble (PG) – This is the same story of JNJ: “It’s been dead forever but they pay right at 3% and raise it year after year. They recently reported a great quarter that beat TheStreet by 11 cents. “
P&G has 21 different billion-dollar brands including Tide, Crest, Charmin, and Gillette that have been key to their earnings growth last quarter. For the first time in a long time they saw organic growth across all over their products and 65% of their profits came from international sales accounts. As Hodges see it, citizens in China and India want to live like Westerners, they want to wash their clothes with Tide and brush their teeth with Crest. "As the world continues to grow they continue to grow as well."
The Boeing Company (BA) Boeing was plagued with bad press when, together with the FAA, the new Dreamliners were grounded due to battery problems. Through it all the stock has held up remarkably well and raised its dividend 10% to 2.6%. “The reason we like Boeing is that we think they’re in the very early innings of this long upgrade cycle in commercial aircraft,” says Bradshaw. “Typically you get on an old and rickety airplane, they need to be replaced. It has a long window of opportunity as airlines upgrade their fleet, we like the potential for it. Although it may take a while to fix the batteries on these fuel efficient Dreamliners it will eventually be done."
Cinemark Holdings (CNK): This movie chain is a small-midcap company offering a 3% yield. Investors might be cautious of movie theaters today with the rise of Netflix (NFLX) and other streaming video services, but CNKs’ same store sales are holding strong. According to Bradshaw the chain is growing in Latin America, especially Brazil. “Movies are newer to those folks and they love to go to the theater. They are growing aggressively down there. All the while Americans continue to go to the movies and spend a fortune on popcorn and Coke."
The Geo Group (GEO): A small cap stock pick, Geo Group manages prisons for overcrowded states and local government prisons. "Geo Group today has a 5.8% yield. The reason we love it is because as of December 31 they converted their business to a REIT, meaning they are going to own the prisons and someone else will manage them. Hodges thinks they’ll raise it throughout the year and we see a potential upside of 38-39% over the next 12-15 months. We’ve owned this company for 2 to 3 years and we continue to like the dividend and the story.”
Words of Wisdom
“At Hodges, we think it’s time for investors to sell bonds and buy some good quality companies. We think you’ll be very well rewarded over the next few years.“
Business Section: Investing Ideas
Do you think Hodges optimistic vision for blue chips is warranted? If you’re looking to follow the footsteps of this fund we help you along here by listing the top 10 holdings of the Hodges Equity Income Fund (HDPEX) as of 1-31-2013. Many of these names overlap with the companies highlighted above.
1. Linn Co, LLC (LNCO, Earnings, Analysts, Financials): LINN is focused on the development and acquisition of oil and natural gas properties, which include various producing basins within the United States. Market cap at $1.35B, most recent closing price at $38.78. Dividend yield: 7.32%.
2. Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Earnings, Analysts, Financials): Engages in the computer-aided designing, manufacturing, packaging, testing, and selling integrated circuits and other semiconductor devices; and manufacturing masks. Market cap at $94.63B, most recent closing price at $18.25. Dividend yield: 2.18%.
3. Procter & Gamble Co. (PG, Earnings, Analysts, Financials): Provides consumer packaged goods in the United States and internationally. Market cap at $208.94B, most recent closing price at $76.49. Dividend yield: 2.94%.
4. The Coca-Cola Company (KO, Earnings, Analysts, Financials): Distributes, and markets nonalcoholic beverages worldwide. Market cap at $172.48B, most recent closing price at $38.70. Dividend yield: 2.64%.
6. Merck & Co. Inc. (MRK, Earnings, Analysts, Financials): Provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Market cap at $128.84B, most recent closing price at $42.63. Dividend yield: 4.03%.
7. Cinemark Holdings Inc. (CNK, Earnings, Analysts, Financials): Cinemark Holdings, Inc. and its subsidiaries engage in the motion picture exhibition business. Market cap at $3.15B, most recent closing price at $27.41. Dividend yield: 3.06%.
8. International Business Machines Corp. (IBM, Earnings, Analysts, Financials): Provides information technology (IT) products and services worldwide. Market cap at $226.15B, most recent closing price at $202.91. Dividend yield: 1.68%.
10. Johnson & Johnson (JNJ, Earnings, Analysts, Financials): Engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Market cap at $214.4B, most recent closing price at $76.70. Dividend yield: 3.18%.
(Written by Rebecca Lipman. Disclosure: Author is long JNJ, PG, KO and IBM.)
HDPEX is rated four stars by Morningstar and ranks in the top five percent of its large-value blend category for 2011. This fund is for investors who seek dividend income from owning a pool of common and preferred stocks. Additional information about the fund is available at these links: http://www.hodgesfund.com/equity-income-fund/ and http://quote.morningstar.com/fund/f.aspx?t=HDPEX®ion=USA&culture=en-us.
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