Gulf Coast Stocks Hold Strong
Funds that focus on sectors or in other ways limit their scope typically run hot and cold. When the investments that fall within their mandate are hot, the funds often perform well. When the investments are cold, the funds suffer. But as Hancock Horizon Burkenroad fund demonstrates, sometimes a narrowly focused fund catches more than its share of the gems.
Burkenroad's picks shine far from the eyes of Wall Street. It focuses entirely on companies of the Gulf Coast, in the states of Alabama, Florida, Georgia, Louisiana, Mississippi and Texas, says manager David Lundgren Jr.
The fund is named for a program at Tulane's Freeman School of Business. About half of its portfolio consists of stocks that Tulane business students follow. At the beginning of the school year, they are assigned companies to track and are expected to come up with buy and sell recommendations, and to write Wall Street-style reports.
The aspiring investing whizzes are seeking "stocks under rocks." Explains Lundgren: "They're looking for high-quality companies that haven't yet been discovered. If a company continues to be successful, then eventually it's discovered by analysts, and the increased coverage helps drive the stock up."
Lundgren then assembles the portfolio, complementing students' research with his own picks. He looks for companies that meet the fund's geographic mandate and sport market values of $2 billion or less. He uses the computer models that Hancock Horizon Investments uses for its other stock funds to winnow out picks. The models combine valuation measures, such as price-earning ratio and free-cash-flow yield (free cash flow divided by market value) and momentum considerations, such as a company's history of beating earnings expectations and recent stock movements. The end result: a portfolio heavy on energy and full of fast-growing small caps.
The fund's performance has been impressive. Over the past year through September 10, its Class A shares (symbol HHBUX) returned 5.2%, which beats 99% of similar funds. And from its December 2001 inception, the fund gained 12.5% annualized, trouncing the Russell 2000 index by more than five percentage points per year on average.
Lundgren says energy stocks are responsible for about half of the fund's outstanding performance in its category. He says the fund's stake in energy-related companies appreciated to about 30% over the first half of the year, thanks to some big gains in names such as exploration-and-production company Petrohawk Energy (HK) and offshore-platform builder Gulf Island Fabrication (GIFI). However, he made the prescient move of cutting energy holdings in half in the first week of July. "When you see a stock make a run of 40% in one quarter, you know there's going to be some give-back," he says.
Energy stocks will always be a major component of the fund, says Lundgren. "We always want to be true to the industry makeup of the region," he says. Lundgren remains bullish on the sector despite its recent stumble and says the price of oil will likely stabilize at about $100 a barrel. Plus, regardless of how the present debate on offshore drilling is resolved, "there won't be less drilling, that's for sure."
Outside of the oil patch, Lundgren has found winners in surprising places. One top performer has been Aaron Rents (RNT), which rents out office furniture. "The company looks for niche markets without the big-box-store competition," he says. As of September 11, the stock was up 55% year-to-date. A more recent addition, Cyberonics (CYBX) makes nerve-stimulation equipment for the treatment of epilepsy and depression. Its shares have jumped 43% this year.
The Class A shares of the $31-million Burkenroad fund levy a 5.25% sales commission and charge 1.4% in annual expenses. The D shares (HYBUX) levy a 1% redemption fee on shares sold within a year of purchase and charge a steep 1.65% in annual fees. For free stock ideas, check out Burkenroad Reports at www.burkenroad.org.