Top small-cap investor sticking by airlines

Published Thu, May 28 20157:00 AM EDTUpdated Tue, Jun 2 20156:48 AM EDT

Craig Hodges, chief executive officer of Hodges Capital Management, is sticking by airlines as the group falls from an all-time high. In the past month, shares of airlines lost nearly 10 percent on concerns over increased capacity, higher fuel costs and fierce competition. But that may be a buying opportunity, according to Hodges, who holds American Airlines in his portfolio for the " Squawk Box " Portfolio Challenge. "We think these issues are way overblown, and trading at four times earnings, we feel AAL has limited downside and tremendous upside potential," said the small-cap specialist, who believes shareholders could even get rewarded in the future with a potential dividend. "As earnings continue to mount, we believe airlines will return this to the shareholders through buybacks, and in some cases, dividends," added Hodges. In the past month, shares of American Airlines are down 18 percent, but remain well off their lows in October, up 49 percent. Below are two of Hodges' other top investment ideas: Trinity Industries (TRN) Oversold rail car, barge and building product manufacturer that is benefiting from a long-term replacement cycle for several types of rail cars as well as other transportation infrastructure. The company operates in several cyclical businesses, but we believe the Street has misjudged the underlying business and we see the earnings holding up better than what the stock might suggest. Fundamentals of TRN warrant a much higher stock price as the ongoing court case involving the highway guardrail business has cast a cloud over the company. We believe this issue will dissipate and the stock will have tremendous upside. We are also encouraged by recent insider buying by several key executives. We consider this a confidence boost and continue to add to our position in the fund. Eagle Materials (EXP) The company is strategically well-positioned as a low-cost producer in gypsum wallboard and cement; we see fairly good pricing power in both of these businesses. Furthermore we expect EXP to generate significant operating leverage as construction markets improve and capacity has tightened from years of industry consolidation. EXP has doubled its earnings power from the peak of the last cycle in 2006 through a combination of acquisitions and organic investments. We believe EXP currently has peak earnings power of $10-$12 per share. Read More Investor: This is the best long-term tech play For a list of the Squawk Box Platinum Portfolio standings, go to www.cnbc.com/squawk-box-portfolio .

Scott Mlyn | CNBC

Craig Hodges, chief executive officer of Hodges Capital Management, is sticking by airlines as the group falls from an all-time high.

In the past month, shares of airlines lost nearly 10 percent on concerns over increased capacity, higher fuel costs and fierce competition.

But that may be a buying opportunity, according to Hodges, who holds American Airlines in his portfolio for the "Squawk Box" Portfolio Challenge.

"We think these issues are way overblown, and trading at four times earnings, we feel AAL has limited downside and tremendous upside potential," said the small-cap specialist, who believes shareholders could even get rewarded in the future with a potential dividend.