The investor’s chief problem – and his worst enemy- is likely to be himself. In the end, how your investments behave is much less important than how you behave.” – Benjamin Graham
In the first quarter of 2025, U.S. stocks experienced their worst quarter relative to the rest of the world in 23 years, reflecting a decline of 4.27% in the S&P 500 Index. Small caps, measured by the Russell 2000, decreased by 9.48% in 1Q25. Despite the sell-off in the recent quarter, stocks have taken an even bigger hit in the first couple weeks of 2Q25, as uncertainty surrounding the economic impact of ongoing tariff negotiations has created an enormous shadow on financial markets worldwide. Moreover, the recent decline has been widespread, with high-profile technology stocks losing more than a trillion of market value and smaller companies, banks, and energy stocks experiencing indiscriminate selling in recent weeks.
A combination of trade tensions, market volatility, and the unknown implications of tariffs have raised concerns over a reacceleration in inflation and slower economic growth. At this point in the game, it is too early to gauge the prevailing trade policy negotiation's outcome fully. Many Wall Street economists have already lowered their expectations for 2025 GDP growth in the US to reflect a recent shift in consumer confidence and erosion in visibility for many businesses. While a recession may unfold this year if trade tensions escalate, a significant economic slowdown is not a foregone conclusion. Nevertheless, the market has at least partly discounted a recession into the stock prices of many industrial and economically sensitive stocks. As a result, P/E multiples have contracted since the start of the year. According to FactSet data, the 12-month forward P/E multiple for the S&P 500 was 19.4X at the end of the quarter compared to 21.4X at the beginning of 2025 and below the 5-year average of 19.9X. The inverse of the current S&P 500 P/E multiple is a forward earnings yield of 5.15%, which is still above the recent 10-year Treasury yield of 4.4%. This comparison would suggest that equity valuations are reasonable, assuming FactSet earnings estimates hold up this year and continue in an uptrend in 2026.
As you can imagine, our discussions with public company management teams over the past month have centered around the impact that tariffs and trade tensions could have directly or indirectly on profit margins and growth prospects. Although it feels like the market has responded indiscriminately to daily developments regarding trade policy, the reality is that not all businesses will be impacted the same. While any widespread restrictions on global trade are a net negative for the stock market and corporate earnings, there will be winners and losers resulting from trade policy changes. Businesses directly dependent on highly integrated global supply chains have less visibility into their cost structure than they may have had a few months ago. However, some companies will see little to no direct impact from such cost pressures. While the uncertainties surrounding global trade policy are sorted out, financial markets around the world have taken a “shoot first, ask questions later” approach, which we view as a ripe environment for active portfolio managers to navigate quickly changing conditions across many sectors and position portfolios to potentially benefit from shifting trends and structural changes across different industries. Looking out over the long term, we see solid secular demand related to infrastructure spending, AI data centers, energy projects, and the reshoring of manufacturing despite near-term uncertainties related to international trade.
While there are ample reasons for investors to fear risk-taking in today's broad equity market, a few factors that indicate that the worst could be behind us are the intense spike in recent volatility and overwhelming negative investor sentiment. As of the time of this writing (4/14/25), the CBOE Market Volatility Index, known as “ the VIX” (fear gauge), has been over 50 for several days over the past couple of weeks, which is consistent with oversold conditions in the market and near the level that was experienced during the depth of the Pandemic. Furthermore, the number of US stocks trading above their 200-day moving average has fallen to an extreme level of around 20%.
For the remainder of 2025, we are balancing long-term optimism and near-term caution as we weigh the risks and rewards of each stock in our portfolios. Although the ongoing tariff tantrum will continue to cloud near-term growth expectations, we are encouraged by the long-term prospects for less regulation, lower budget deficits, more efficient government spending, and new capital investments in public infrastructure and private enterprise. One of the biggest concerns for the stock market in 2025 is a reacceleration of inflation, which could pressure the P/E multiples of growth stocks and keep interest rates higher for longer. What we know for sure is what we do not know. We do not know what actions the Fed may take to curtail a resurgence in inflation or the exact structure and timing of new trade deals. What we do know is that change is inevitable. As a result, we would expect to see volatility in the months ahead. While short-term market volatility can sometimes seem overwhelming, we expect the next few months to create opportunities for active portfolio managers pursuing mispriced stocks. As a result, our investment team is laser-focused on the fundamentals of individual stock selection and the prospects for future earnings power. Furthermore, we would not be surprised to see new leadership emerge within the market or at least a broader number of stocks participating in any upside from earnings growth over the next twelve months.
In summary, our focus is not on predicting short-term changes in interest rates, foreign currencies, or commodity prices. Instead, we prioritize identifying prevailing trends and, more importantly, evaluating the earning potential of our portfolio companies within their respective industries. At Hodges Capital, our investment team is dedicated to uncovering opportunities in companies that are well-managed and guided by strategic innovation and sound business decisions rather than reacting to daily market fluctuations. We want to assure Hodges Funds investors that our fundamental investment philosophy remains steadfast. Furthermore, we view this environment as an ideal opportunity for our portfolio managers to carefully select stocks we believe will deliver enduring value for our shareholders. Your trust is invaluable to us, and we remain committed to disciplined investment practices.
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. The current performance of the Funds may be lower or higher than the performance quoted. Performance data current to the most recent month-end may be obtained by calling 866-811-0224. The Funds impose a 1.00% redemption fee on shares held for thirty days or less (60 days or less for Institutional Class shares). Performance data quoted does not reflect the redemption fee. If reflected, total returns would be reduced. Performance reflected is net of all other fees and expenses.
The return for the Hodges Small Cap Fund amounted to a loss of 12.21% in the first quarter of 2025, compared to a 9.48% decrease for the Russell 2000 Index. Although small-cap stocks have now underperformed large-cap stocks for the better part of the past decade, we still consider the current risk/reward for holding quality small-cap stocks as attractive. While small-cap stocks tend to experience greater volatility during market turmoil, we expect this segment to generate above-average relative risk-adjusted returns over the long term. Furthermore, many small-cap companies are uniquely positioned to benefit from deregulation, a pick-up in M&A activity, AI productivity enhancements, and the reshoring of manufacturing activity in the year ahead.
The Hodges Small Cap Fund remains well diversified across industrials, transportation, technology, and consumer-related names, which we expect to contribute to the Fund's long-term performance. The Fund recently took profits in several stocks that appeared overvalued relative to their underlying fundamentals and established new positions with an attractive risk/reward profile. The Fund had a total of 47 positions on March 31, 2025. The top ten holdings amounted to 37.7% of the Fund's holdings and included Matador Resources (MTDR), Texas Pacific Land Corp (TPL), Taylor Morrison Home Corp (TMHC), Halozyme Therapeutics Inc (HALO), Eagle Materials Inc (EXP), Prosperity Bancshares (PB), Academy Sports & Outdoors (ASO), Hanover Insurance Group Inc (THG), On Holding Ltd (ONON), and Group 1 Automotive Inc (GPI).
The Hodges Fund's first quarter 2025 return amounted to a loss of 6.80% compared to a 4.27% loss for the S&P 500 Index. Underperformance in the recent quarter was attributed to the portfolio's exposure to a handful of industrial and consumer stocks that have seen increased volatility this year in response to fear of an economic slowdown. The Hodges Fund's turnover was elevated in the recent quarter as we have carefully updated the portfolio holdings, moving into stocks that offer above-average returns relative to their downside risks over the next twelve to eighteen months.
The Hodges Fund's portfolio managers remain focused on investments where we have the highest conviction based on fundamentals and relative valuations. The number of positions held in the Fund at the end of the recent quarter was 41. On March 31, 2025, the top ten holdings represented 46.10% of the Fund's holdings. They included Texas Pacific Land Corp (TPL), Uber Technologies (UBER), Matador Resources Co (MTDR), DraftKings Inc (DKNG), Expand Energy Corporation (EXE), Freeport-Mcmoran Inc (FCX), SharkNinja, Inc. (SN), On Holding (ONON), Palantir Technologies Inc (PLTR), and Micron Technology Inc (MU).
The Hodges Small Intrinsic Value Fund experienced a loss of 11.93% in the first quarter of 2025 compared to a loss of 7.74% for its benchmark, the Russell 2000 Value Index. The Fund's recent underperformance relative to the benchmark was impacted by weakness in several consumer discretionary and industrial stocks during the quarter. The number of positions held in the Fund at the end of the recent quarter was 44. On March 31, 2025, the top holdings represented 35.60% of the Fund's holdings. They included Texas Capital Bancshares (TCBI), Home Bancshares (HOMB), Gulfport Energy Corporation (GPOR), Shoe Carnival Inc (SCVL), Eagle Materials Inc (EXP), Halozyme Therapeutics Inc (HALO), Academy Sports & Outdoors (ASO), Banc of California (BANC), Ethan Allen Interiors Inc (ETD), and P10 Inc (PX).
The Hodges Blue Chip Equity Income Fund was down 3.62% in the first quarter of 2025, compared to a loss of 4.49% for its benchmark, the Russell 1000 Total Return Index. Positive relative performance in the recent quarter was attributed to stock selection and sector allocation. We believe the current investment landscape offers ample opportunities among high-quality, dividend-paying stocks with solid upside potential. We expect underleveraged balance sheets and corporate profits across most blue-chip stocks to support stable dividends over the next several years. The Blue Chip Equity Income Fund remains well-diversified in companies that we believe can generate above-average income and total returns on a risk-adjusted basis. The number of positions held in the Fund at the end of the recent quarter was 28. The top ten holdings at the end of the quarter represented 45.90% of the Fund's holdings and included Apple Inc (AAPL), Nvidia (NVDA), Walmart Inc (WMT), American Express Co (AXP), Eli Lilly & Co (LLY), Microsoft Corp (MSFT), Wells Fargo & Company (WFC), Abbvie Inc (ABBV), Broadcom Inc (AVGO), and Oneok Inc (OKE).
In conclusion, we remain optimistic regarding the long-term investment opportunities surrounding the Hodges Mutual Funds. By offering four distinct mutual fund strategies covering most segments of the domestic equity market, we can serve most financial advisors and individual investors' diverse needs. Moreover, our entire investment team is highly committed to rigorously studying companies, meeting with management teams, and observing trends to navigate today's ever-changing financial markets. Feel free to contact us directly if we can address any specific questions.
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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.
The Fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory and summary prospectuses contain this and other important information about the Hodges Funds, and it may be obtained by calling 866-811-0224, or visiting hodgescapital.com/mutual-funds. Read it carefully before investing.
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 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 Total Return 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 US 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 US companies in the Russell 3000 Index, as ranked by market capitalization. The Russell 3000 Index is a stock index consisting of the 3000 largest publicly listed companies, representing about 98% of the total capitalization of the entire US stock market. You cannot invest directly in an index. The Russell 2000 Value Index measures the performance of the small-cap value segment of the US 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.
Cash Flow: A revenue or expense stream that changes a cash account over a given period.
Price/earnings (P/E): The most common measure of how expensive a stock is.
Earnings Growth is not a measure of the Fund’s future performance.
Hodges Capital Management is the Advisor to the Hodges Funds.
The Hodges Funds are distributed by Northern Lights Distributors, LLC.