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Letter From Cobleskill: Autumn 2024

Letter From Cobleskill: Autumn 2024

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    Dear Fellow Investor,

    As I pen this letter, we are pleased with the overall performance of our mutual funds so far this year and, more importantly, over the long term. Despite our positive view, your FAM Funds team understands that you may be apprehensive with the November election looming. The interest rate environment, fears of a recession, and artificial intelligence (AI) may also be on your mind.

    Even though there seems to be a constant drumbeat of negative and confusing news, Fenimore’s investment research analysts see order in the disorder and this keeps us grounded. What we are observing is that, in general, corporate earnings are still growing, and we believe we are invested in a collection of high-quality businesses that are positioned well for the long term.

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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PRESIDENTIAL ELECTION
Regardless of your politics, this year’s presidential election is creating some concern. However, when we look at past election years, the stock market has performed relatively well no matter which party controls the White House or Congress. It is also reassuring that the stock market rose in 20 of the last 24 election years.1 The Wall Street Journal published an article in early September about this topic with essentially the same takeaway. While our analysts are keenly aware of current issues, they continually look ahead seeking to own high-quality companies because, in our experience, this is the key to building wealth over time.

INTEREST RATES
Interest rates have slowly inched downward over the past two years in anticipation of Federal Reserve rate cuts. These rate cuts were confirmed at an August 2024 meeting where the Federal Reserve Chairman, Jerome Powell, stated, “The time has come for policy to adjust.” Lower rates should help increase home and automobile purchases, create an uptick in commercial construction projects, position businesses in certain sectors to thrive, and improve consumer confidence.

FEARS OF A RECESSION
Profits are still growing, overall, but results are mixed across sectors and industries. For instance, insurance, aggregates, and some high-tech pockets are performing well while industrials and banking are flat.

Our research team continues to visit our holdings’ headquarters and monitor them, attend conferences to discover new opportunities, and engage with customers and suppliers at industry trade shows. We still see encouraging signs at the company level, including dividend growth, stock buybacks, and mergers and acquisitions. Because of this shareholder value creation, coupled with increasing profits, we remain bullish on stocks since stock prices tend to follow earnings over time.

AI
Increasing enthusiasm surrounding AI and considerable capital investments in its infrastructure have helped propel the positive stock market returns this year. At the same time, we are still in the very early stages of this technology and no one knows what the future holds. In fact, there are many similarities to the excitement of the dot-com era.

As businesses strive to constantly improve, AI should help them to mine, process, and analyze data faster than ever before. While it remains to be seen how AI will take shape, we expect that many of our holdings should benefit from increased AI investment due to the services and technologies they provide.

LOOKING AHEAD
To reiterate, rising corporate profits typically lead to rising stock prices. These earnings are the result of hard work, ingenuity, and the compounding of knowledge and capital—not politics. Throughout Fenimore’s half-century in business, it has paid to believe in corporate America.

We will continue to follow our market-tested investment approach, identifying what we deem to be high-quality companies, purchasing shares in them if they are available at appealing prices, and, ideally, holding them for many years as they grow profits. When we execute our plan effectively, we expect healthy returns over time, regardless of the temporary challenges experienced along the way.

STAY CONNECTED
Please do not hesitate to connect with us about your investments and financial goals at our Cobleskill or Albany office. You can also contact us from the comfort of your home by calling 800.932.3271 or emailing us at info@fenimoreasset.com.

Thank you for your confidence in us.

Sincerely,
John D. Fox, CFA®
CHIEF INVESTMENT OFFICER

  

1 FactSet as of 8/31/2024

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Celebrating 50 Years of Investing

Celebrating 50 Years of Investing

In an ever-changing world, consistency matters.

At Fenimore Asset Management, we’ve stayed true to our investment philosophy and guided investors through the many ups and downs since 1974.

For 50 years, investors have relied on our in-depth investment research, focus on quality stocks, and personalized service — from people who truly care.

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WALL STREET WEEK INTERVIEW WITH TOM PUTNAM (JANUARY 29, 1993)

Wall Street Week Interview with Tom Putnam: January 29, 1993

CHANGING TIMES. UNCHANGING PRINCIPLES: Looking back as we celebrate Fenimore’s 50th Anniversary.

Join us in revisiting a pivotal moment: our Founder, Tom Putnam, sharing insights on Wall Street Week with Louis Rukeyser on January 29, 1993. Just like our steadfast stock selection process over the last 50 years, our mantra remains unchanged – focus on the long term.

At Fenimore, we meticulously assess companies through personal meetings, tours, and extensive research. Our criteria are rigorous: from understanding business models to ensuring strong balance sheets and ethical management.

Discover more in this interview excerpt

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Letter From Cobleskill: Spring 2024

LETTER FROM COBLESKILL: Spring 2024

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    Dear Fellow Investor,

    A sense of stability has returned to the investment world as it appears that inflation is abating and the economy is growing slowly. Our team views stability with optimism and the stock market, which is forward-looking, has responded accordingly. The S&P 500 Index hit a new high in January after more than two years since its previous high.1

    How did we get to where we are today? Late in 2021, inflation began to accelerate. When it became clear that high inflation was not temporary, the Federal Reserve (“Fed”) intervened. The Fed increased short-term interest rates significantly — at a record pace of just 18 months. Interest rates are a key factor in valuing assets, so this sudden change caused the prices of stocks, bonds, and real estate to decline.

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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Given this backdrop, why are stocks currently performing well overall? It seems that the market is now expecting the Fed to cut short-term interest rates due to inflation stabilizing. No one knows what the Fed will do, but we believe that steady interest rates (no more increases) are a positive for asset prices across the spectrum. Additionally, corporate earnings are projected to achieve mid- to high-single-digit growth this year. This adds to the optimism because stock prices tend to follow earnings growth over time.

Even with the volatility and uncertainty over the past two years, you may be pleasantly surprised to know that the stock market has generated good returns over one, three, five, and 10 years as of year-end 2023.2 Likewise, we hope you are pleased when you review your FAM Funds quarterly statement.

50 YEARS OF UNCHANGING INVESTMENT PRINCIPLES
Just as Fenimore Asset Management’s stock selection process has been steadfast over the last half-century despite an ever-changing investment landscape, so has our mantra — focus on the long term. As we celebrate our golden anniversary, our research analysts remain dedicated to identifying select, quality businesses that we believe can grow and produce attractive returns over time.

We evaluate these companies carefully through personal meetings with leadership, facility tours, and extensive research. Our approval criteria are unyielding: small to midsize firms with business models we understand and clear competitive advantages; strong balance sheets, free cash flow generation, and increasing cash profits; experienced and ethical management; and the potential to deliver long-term, sustainable growth for our investors.

Developing an in-depth understanding of companies, including their economic worth, allows us to welcome market volatility rather than fear it. Sometimes, that means moving on to what we think are better opportunities. Other times, it means buying more shares in the face of market panic. Fenimore prepares for markets and does not predict them. We believe that having a long-term perspective, knowing what you own, and investing in quality, well-run businesses is the best way to outpace inflation and grow wealth over the long haul.

LOOKING AHEAD
While matters seem to have stabilized and our team is positive about the future, many outcomes are still possible. As a result, we will continue to stick to our market-tested approach and identify what we deem to be the best companies, buy shares in them if they are available at reasonable prices, and hold them for many years as they increase earnings. If we execute our process well, then we expect healthy returns over time — regardless of the temporary macro conditions experienced along the way.

NEW ALBANY OFFICE NOW OPEN
On March 6, Fenimore moved into our new Albany branch office with the goal of ensuring that the investor experience and work environment are the same as our Cobleskill headquarters. Located at 142 Wolf Road, the new location is more than double the size of our previous Albany office. This larger space accommodates multiple operating groups to better serve you. We welcome you to visit us or schedule an appointment.

LET’S TALK
Please do not hesitate to connect with us about your investments and financial goals in our Cobleskill or Albany office, or from the comfort of your own home. Call 800.932.3271 or email us at info@fenimoreasset.com.

Thank you for your confidence in us.

Sincerely,
John D. Fox, CFA®
CHIEF INVESTMENT OFFICER

  

  

1 FactSet as of 1/19/2024
2 FactSet as of 12/31/2023

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Investing at Market Highs

Investing at Market Highs

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    Fenimore Portfolio Manager, Will Preston, CFA®, shares his thoughts on investing at market highs.

    The stock market has hit 14 “all-time” highs in the first two months of 2024. While this is great for portfolios, we understand it can also raise concerns about investing at market highs, particularly given the 9-month, -25% bear market that followed the last peak in early 2022. I’d like to reassure you that a long-term view is what matters most.

    Compared to the last peak in January 2022, today’s investing backdrop is very different. In January 2022, inflation was +7.6% and rising, along with growing expectations that the Federal Reserve would have to raise interest rates to combat the persistent inflation. This of course turned out to be true with interest rates increasing 11 times in 16 months.

    In February 2024, inflation, as measured by the Consumer Price Index, increased 3.2% year-over-year and has been trending down, supporting investor expectations that the Fed will not need to hike rates again this cycle. While some focus will remain on when the Fed will begin cutting interest rates, long-term company value creation continues to come from businesses growing earnings and cash flow.

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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Another contrast to the previous market peak was the speculative investments that drove a lot of the returns. The IPO market set a record in 2021 and we saw wild returns in meme stocks, SPACs (special purpose acquisition companies), and crypto. We do not see this speculative behavior today. 

Comparing trailing multi-year returns for these market indices as of the end of February 2024 against the same trailing multi-year periods at the end of 2021 illustrates the exuberance that existed in 2021.

2/29/2024 3-YR TR
S&P 500 11.91%
Russell Mid Cap 5.51%
Russell 2000 -0.94%
NASDAQ Composite 7.69%
12/31/2021 3-YR TR
S&P 500 26.07%
Russell Mid Cap 23.29%
Russell 2000 20.02%
NASDAQ Composite 34.26%

Performance data quoted above is historical. Past performance is not indicative of future results, current performance may be higher or lower than the performance data quoted. Investment returns may fluctuate; the value of your investment upon redemption may be more or less than the initial amount invested.

As you can see, trailing returns are closer to long-term US equity return averages compared to 2021, which should bode well for future return prospects. 

In summary, the current market environment has notable distinctions from that of 2021 and early 2022. Despite potential reservations about investing at market peaks, it’s important to remember that the stock market regularly achieves all-time highs, and today’s “peak” will inevitably be surpassed by a new market high in the future.

  • S&P 500 New all-time highs by year

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    Ultimately, when your objective, like ours, is to preserve and compound capital over the long term, it necessitates investors to stay invested irrespective of market conditions. This has been our philosophy for the last 50 years and will continue for the next 50.

    Thank you for allowing us to be your trusted investment partner.

    Will Preston, CFA®
    Portfolio Manager, FAM Dividend Focus Fund


Securities offered through Fenimore Securities, Inc. Member FINRA/SIPC, and advisory services offered through Fenimore Asset Management, Inc.

Important Disclosures
Performance data quoted above is historical. Past performance is not indicative of future results, current performance may be higher or lower than the performance data quoted. Investment returns may fluctuate; the value of your investment upon redemption may be more or less than the initial amount invested. All returns are net of expenses. To obtain performance data that is current to the most recent month-end for each fund as well as other information on the FAM Funds, please go to fenimoreasset.com or call (800) 932-3271.

Please consider a fund’s investment objectives, risks, charges, and expenses carefully before investing. The FAM Funds prospectus or summary prospectus contains this and other important information about each Fund and should be read carefully before you invest or send money. To obtain a prospectus or summary prospectus for each fund as well as other information on the FAM Funds, please go to fenimoreasset.com or call (800) 932-3271.

This presentation was prepared exclusively for the benefit and use of Fenimore Asset Management, Inc. (“Fenimore”) and FAM Funds clients to whom it is directly addressed and delivered and does not carry any right of publication or disclosure, in whole or in part, to any other party. Neither this presentation nor any of its contents may be distributed or used for any other purpose without the prior written consent of Fenimore.

In part, the purpose of this presentation is to provide investors with an update on financial market conditions. The description of certain aspects of the market herein is a condensed summary only. This summary does not purport to be complete and no obligation to update or otherwise revise such information is being assumed. These materials are provided for informational purposes only and are not otherwise intended as an offer to sell, or the solicitation of an offer to purchase, any security or other financial instrument. This summary is not advice, a recommendation or an offer to enter into any transaction with Fenimore or any of their affiliated funds.

These materials contain the views and opinions of Fenimore. Additionally, the information herein is subject to change and is not intended to be complete or to constitute all of the information necessary to evaluate adequately the consequences of investing in any securities or other financial instruments or strategies described herein. These materials also include information obtained from other sources believed to be reliable, but Fenimore does not warrant its completeness or accuracy. In no event shall Fenimore be liable for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction.

We undertake no duty or obligation to publicly update or revise the information contained in this presentation. In addition, information related to past performance, while helpful as an evaluative tool, is not necessarily indicative of future results, the achievement of which cannot be assured. You should not view the past performance of Fenimore funds, or information about the market, as indicative of future results.

All projections, forecasts and estimates of returns and other “forward-looking” information not purely historical in nature are based on assumptions, which are unlikely to be consistent with, and may differ materially from, actual events or conditions. Such forward-looking information only illustrates hypothetical results under certain assumptions and does not reflect actual investment results and is not a guarantee of future results. Actual results will vary with each use and over time, and the variations may be material. Nothing herein should be construed as an investment recommendation or as legal, tax, investment, or accounting advice.

There is no guarantee that any of the estimates, targets or projections illustrated in this summary will be achieved. Any references herein to any of Fenimore’s past or present investments, portfolio characteristics, or performance, have been provided for illustrative purposes only. It should not be assumed that these investments were or will be profitable or that any future investments will be profitable or will equal the performance of these investments. There can be no guarantee that the investment objectives of Fenimore will be achieved. Any investment entails a risk of loss. An investor could lose all or substantially all of his or her investment. Unless otherwise noted, information included herein is presented as of the date indicated on the cover page and may change at any time without notice.

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FAM Small Cap Portfolio Manager Talks Valuations

FAM Small Cap Portfolio Manager Talks Valuations

  • FAM Small Cap Fund Portfolio Manager, Andrew Boord, shares his thoughts on small-cap valuations.

    We definitely think small caps are on average trading at much lower valuations than large caps. We also regularly remind ourselves, and others, that historically small and large caps have taken turns leading the market, often for 10 to 15 years at a time, so eventually small caps will outperform large caps.  The big difference in valuations doesn’t mean relative performance will change tomorrow, but it does improve the odds of small caps outperforming large caps over the next 5 to 10 years. 

    That said, we at Fenimore focus 90% of our efforts on about 200 small businesses. We know very little about the other 1,800 lower quality small caps, and probably even less about macro topics, which is why we do not speak to the valuation of the Russell 2000, and instead focus on the valuation of our small cap investible universe. I would rather talk about the industries and businesses we intimately know—Russian fish, new floor offerings, risk of office loans, or the pricing of appliances because it impacts a new idea we’re evaluating—than employment trends. This is why it’s always a challenge to reconcile what we know or are hearing from our companies with the macro questions of the day.

  • Andrew Boord

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    Andrew Boord
    Portfolio Manager, FAM Small Cap Fund

Rather than comment about Russell 2000 valuations, we think about the valuations of the 27 companies we own stock in and the other 10 to 20 we might like to invest in eventually. When we think about our positions, valuations feel reasonable overall, maybe even low-ish, but it varies by company. Below is a quick summary of our 10 largest positions (as of 1/31/24), with particular focus on current valuations versus the prior 5 to 10 years.

  • CBIZ (CBZ) is trading at a higher-than-normal valuation. Our hope is that EPS growth stays high and they grow into it.
  • ExlSerivice Holdings (EXLS) valuation was on the high side of normal about a year ago but has declined considerably. Using FactSet data, the stock is about 19x forward P/E. Relative to the past 10 years, this is in the middle of the range.
  • Colliers International Group (CIGI) is very diverse by property type, service type, and geography. That said, soft U.S. office leasing and property sales brokerage is a headwind. So, the multiple is middle of the road versus history, while earnings are a little depressed (probably by 15 to 20%) by the lack of office transactions.
  • Pinnacle Financial Partners (PNFP) is trading around 1.7x tangible book. Clearly, investors fear bank stocks today. Outside of now and the COVID pandemic, the stock regularly traded around 2.5x tangible book.
  • Trisura Group (TRRSF) is only trading for about 11x earnings, which we view as cheap.
  • Chemed Corp. (CHE) is not particularly cheap, although it rarely is, at about 25x forward earnings. Over the past decade, the stock has regularly traded between 20x to30x. I would argue that EPS are a little depressed right now as the hospice business is still rebounding post-COVID, but even if true, the stock isn’t cheap.
  • Choice Hotels International (CHH): Investors are concerned that CHH may buy Wyndham, adding debt and integration risk. As a result, CHH is trading around 18x forward P/E, which is on the low side of normal versus history. 
  • Nomad Foods (NOMD) struggled with supply chain issues especially after Russia invaded Ukraine. Higher interest rates are a headwind too. They are starting to come out of this transition period, as you can see by the recent stock move. However, it still appears to be trading at 9x to 10x forward earnings.
  • Brookfield Infrastructure Corp. (BIPC) is a dividend stock, so I would argue the best way to value it is by dividend yield; our thesis is that long-term return will be the yield plus the growth rate of hopefully 5% to 9%. Yield-sensitive stocks sold off as interest rates rose. Today, BIPC yields about 4.4%. History is a bit limited, but in the past the stock usually yielded 3% to 3.7%. I would argue that the stock is cheap.
  • Landstar System (LSTR) is a truckload broker—a fabulous, yet volatile business. Demand goes through cycles tied to GDP growth, while supply goes through its own cycles tied to truck builds. In the past few quarters, they have been in a definite down cycle, which is the deceleration phase after the post-COVID boom. While the multiple may not look cheap, EPS are quite depressed. The stock should do quite well when the next upcycle inevitably occurs. 

I should add that during the past 13 months, in the FAM Small Cap Fund, we trimmed CBIZ slightly while adding to Colliers, Pinnacle, Trisura, Choice, Nomad, and Brookfield Infrastructure Corp. 

Fenimore was founded on and remains true to a value-oriented investment approach focused on individual companies. This value investing philosophy has been applied by the firm in all environments, regardless of market cycle stages, for the last 50 years.

This gives us confidence that applying our traditional focus on valuation to the small-cap equity universe is a worthwhile endeavor. Of course, the concept of “value” does not exist in a vacuum: some stocks are “cheap for a reason.” The quality profile of a company is integral to our assessment of overall valuation.

STAY CONNECTED
If you have any questions, please reach out to us. Call 800-721-5391, email us at info@fenimoreasset.com, or stop by either our Albany or Cobleskill location.

Thank you for your ongoing trust.

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John Fox, CIO, Joins Walter Thorne of the Albany Business Review for Albany Executive Insights

John Fox, CIO, Joins Walter Thorne of the Albany Business Review for Albany Executive Insights

John Fox, CIO, is honored to join Walter Thorne, Market President and Publisher of the Albany Business Review, for the Albany Executive Insights series, presented in partnership with the Albany Business Review.

Learn more as John walks through Fenimore’s investment approach:

  1. Quality Business
  2. Strong Financials
  3. Proven Management
  4. Margin of Safety
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Part Three: CEO Anne Putnam Discusses Her Passion for Fenimore with Walter Thorne – Albany Executive Insights

Part Three: CEO Anne Putnam Discusses Her Passion for Fenimore with Walter Thorne – Albany Executive Insights

Anne Putnam, CEO, is honored to join Walter Thorne, Market President and Publisher of the Albany Business Review, for the Albany Executive Insights series, presented in partnership with the Albany Business Review. In the final video of our 3-part series, Anne discusses what drives her day-to-day in continuing to grow Fenimore, including the elements of:

  1. Having trusted relationships
  2. Seeing it firsthand growing up

This sponsored interview about the Firm’s advisory services has been published by The Albany Business Review (“ABR”), a non-advisory client that provides various marketing services to Fenimore. Cash compensation was given in exchange for the publishing of this sponsored content. Due to Fenimore’s relationship with ABR, material conflicts of interest include but are not limited to a financial incentive to promote this sponsored interview.  These compensated endorsements are intended to objectively showcase the Firm and its services; however, it is important to understand that compensation may have influenced the content of this article therefore we encourage clients and prospective clients to independently research and assess the Firm’s investment offerings, taking into consideration their unique financial goals, risk tolerance, and investment preferences before making any investment decisions.

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ESTATE PLANNING: Plan Today. Enjoy Tomorrow. 

ESTATE PLANNING: Plan Today. Enjoy Tomorrow. 

Estate planning is important to all investors, so we created a video that provides a helpful overview and actionable steps you can take. 
(viewing time = 34:35)   

The subject matter focuses on the why, what, when, and how of estate planning. Topics include: 

  • The main goals.
  • Necessary core documents.
  • A simple checklist.
  • Life events to prioritize.
  • Attorneys to consider.
  • When to review your plan.

You can choose to watch the entire program or any of these shorter videos:

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