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Invest in the Katrina recovery
The Hancock Horizon Burkenroad Fund invests only in small companies in the states Hurricane Katrina hit. It could do well in the next few years as money pours in to fund a recovery.
By Timothy Middleton
The epicenter of last week's Hurricane Katrina disaster is home to a tiny mutual fund that specializes in Deep South companies that will both benefit from reconstruction -- and will suffer mightily until it is accomplished.
The Hancock Horizon Burkenroad Fund (HHBUX), based in Gulfport, Miss., invests strictly in small companies along the Gulf of Mexico from Texas to Florida, many of them local in nature. More than 20% of the fund's holdings are in the oil and natural-gas industries. The top holding is Team (TMI, news, msgs), an Alvin, Texas-based company that performs specialized services repairing industrial equipment, like valves. Such holdings have helped the fund soar about 25% over the past 12 months.
It is increasingly clear that anything resembling normal commerce will be disappearing in cities such as New Orleans, Biloxi, Miss., and Gulfport. But it's equally clear that eventually more resources will flow into the devastated region than have ever before been mobilized on U.S. soil. Over the next three to five years, Burkenroad's fortunes could be golden.
The region as a whole will be a beneficiary of reconstruction, "but they've got to go through hell to get there," says William F. Dwyer, chief investment officer of MTB Investment Advisors, an institutional money manager in Baltimore that's not affiliated with Burkenroad.
'Stocks under rocks'
Holdings like Team and Houston-based KCS Energy (KCS, news, msgs), an oil and natural-gas company with operations outside the affected area, buoyed the fund last week. On Wednesday, as the scope of the disaster became evident, Burkenroad shot up 1.9%, bringing its gains for the year to 6.4%.
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Burkenroad owns pieces of a broad swath of the deep South's economy, including banks whose borrowers may just walk away from their now-empty land and real-estate investment trusts whose properties were lashed by some of the worst winds and flooding in modern American history.
The fund's name derives from a research program at the A.B. Freeman School of Business of Tulane University. Graduate students probe companies headquartered in the region that tend to be overlooked by Wall Street analysts; they playfully refer to their finds as "stocks under rocks." The fund's average market capitalization is a minuscule $630 million.
With only $12 million under management, Burkenroad Fund is nearly as obscure as the companies in which it invests. Contacting it last week was impossible: Telephone service was out; so were Internet servers at places like Tulane, in New Orleans, and Hancock Bank in Gulfport, the fund's investment adviser.
I wrote about the fund two years ago, however, and was able to ferret out more current information from such databases as those of Morningstar and the Securities and Exchange Commission. There have not been a lot changes at the fund because only a few hundred companies fall under its review, and it owns fewer than 60 of them. Turnover is a scant 17%.
A well-oiled portfolio
Burkenroad isn't limited to Tulane's research, but the majority of investment ideas do come from the students' work. Since the Gulf of Mexico and its immediate environs supply about a quarter of the nation's energy needs, the fund is top-heavy with oil-patch names, currently accounting for 21.2% of total assets. Consumer companies rank second, industrial materials third, and financial and business services account for most of the balance. Technology and telecommunications are largely absent from the portfolio, and health care is about half the market's weighting.
The fund puts roughly equal money into each position, so the 20 largest, which are allotted between 2% and 2.5% of assets, get that way by doing well. The others account for between 1% and 2% of assets. The portfolio is more concentrated than the typical equity fund, but, despite this, it is less volatile than the market itself and much less volatile than the typical small-cap fund.
Burkenroad's roster of stocks is tilted heavily toward local economies. Among its top positions are:
- Parkway Properties (PKY, news, msgs), a Jackson, Miss.-based real-estate investment trust that owns office buildings throughout the South. "Our physical assets sustained only minor damage," the company reported last Tuesday.
- EnergySouth (ENSI, news, msgs), a Mobile, Ala.-based gas utility.
- IBERIABANK (IBKC, news, msgs), a small commercial bank headquartered in Lafayette, La., west of Baton Rouge, La. It said less than 17% of its loans and deposits were made in the New Orleans area.
- Denbury Resources (DNR, news, msgs), a half-billion dollar (annual sales) oil and gas operator, 90% of whose production comes from areas in Louisiana and Mississippi hardest hit by the storm. It said damage was minor, but, without electricity, 90% of its oil and 50% of its gas production was offline.
- First Horizon Pharmaceuticals (FHRX, news, msgs), a drug wholesaler based in Alpharetta, Ga.
- Frozen Food Express (FFEX, news, msgs), a trucking company based in Dallas.
(A note: Both Hancock Holding (HBHC, news, msgs), the parent of Hancock Bank, and Denbury Resources are on MSN Money's StockScouter top 50 list for September.)
Profiting in obscurity
Burkenroad's targets are small companies with strong balance sheets that are covered by five or fewer analysts. These very small, unknown stocks are potentially the market's most rewarding, and Burkenroad defied the bear market to return 34.9% in 2003 and 24.8% last year.
The fund's biggest problem is its obscurity. It has a 5.25% front-end load, which ought to encourage brokers to sell it, but they obviously don't because the assets of the fund, which was launched in 2001, are so small. My broker, Charles Schwab, doesn't handle it.
Still, good small-cap funds are rare, and those investing in the smallest companies are rarer still, because the good ones quickly close to new investors. This one may not perform well for some months but, at some point, the South is going to rise again.
At the time of publication, Timothy Middleton didn't own any securities mentioned in this article.
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