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Q3 Earnings: Resilient Small Caps

Written by Spiral Design on . Posted in Insights, Investment Insights.

Q3 Earnings: Resilient Small Caps

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    • Small-cap earnings are strong, from our viewpoint, in an environment that is working through supply chain and inflationary challenges. Per Bloomberg, 87% of Russell 2000 companies reported earnings with 60% beating sales expectations and earnings estimates (as of 11/12/2021). 
    • Supply chain disruption has negatively impacted the ability of many businesses to procure adequate supplies. Less supply has also led to input cost inflation. Additionally, numerous companies are reporting hiring challenges resulting in wage inflation.
    • Many firms that we have heard from expect these issues to last well into 2022. To the extent they last longer, margins will probably be pressured at most businesses. 
    • Despite these challenges, demand remains strong, the consumer is healthy, and many enterprises have successfully raised prices to combat these issues.
    • Fenimore remains focused on the long term. Some of our small-cap holdings will likely face short-term disruption. Several should find it easier to withstand these shocks and some should actually benefit. Regardless of the current issues, we believe that all our holdings are high-quality and remain positive as it relates to their long-term prospects.    
  • Kevin Gioia

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    Kevin Gioia, CFA
    Portfolio Manager, FAM Small Cap Fund

THE QUEST FOR QUALITY SMALL-CAP STOCKS

White Paper – Read Here

Podcast – Listen Here

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A Quarter Century of Finding Value in Dividend-Paying Mid-Cap Companies

Written by Spiral Design on . Posted in Insights, Investment Insights.

A Quarter Century of Finding Value
in Dividend-Paying Mid-Cap Companies

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    Before the internet boom went bust in the early 2000s and prior to FAANGs1 dominating passive investors’ portfolios, one mutual fund strategy found that the most straight forward approach led to creating long-term wealth via investing in great companies.

    This year marks the 25th anniversary of Fenimore’s FAM Dividend Focus Fund, which has outperformed2 with a concentrated portfolio of mid-cap names with long-term growth potential. According to the fund’s Co-Manager Paul Hogan, who has managed the fund since its inception, the fund’s strong emphasis on quality rather than riding fashionable market trends is what makes the difference. The fund’s mantra is that of Fenimore Founder Thomas O. Putnam in seeking out investments to make “the train go faster not longer.”

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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In searching for the right stocks, mid-caps are a fertile space because they typically grow at a faster clip than large-cap companies. For the most part, the faster a company grows, the faster it can grow its dividend to shareholders as well. The dividend provides additional yield that in turn boosts long-term portfolio gains. While there are numerous mutual funds focused on large-cap dividend paying strategies, FAM’s focus on the mid-cap sector essentially doubles the number of companies to consider.

When evaluating these companies, Mr. Hogan and Co-Manager William Preston travel extensively to meet management teams in-person to not only get a sense of the company ethos but gain insights on whether a company is best in class and has room to grow.

Trade shows too offer a unique vantage point to see a company’s potential in action. A key question Mr. Hogan and Mr. Preston seek to answer is why clients want to do business with a particular company. Such events offer confirmation. Mr. Hogan recalled that about a decade ago one of the fund’s original holdings IDEX Corporation unveiled a new battery-operated ‘jaws of life’ tool demonstrating how with little training anyone could save a life.

When we look at our investment strategy, the first thing we are always concerned about is preservation of capital,” said Mr. Hogan. “So for us it’s first preserve capital, second generate an attractive return, and third, let the compounders compound.”

1 Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOG).
2 Morningstar 3, 5, 10 year periods vs. the Russell Midcap Index.

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Letter From Cobleskill - Fall 2021

Letter from Cobleskill – Autumn

Written by Spiral Design on . Posted in Featured News & Insights, Investment Insights, Uncategorized.

Letter From Cobleskill

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    Dear Fellow Shareholder,

    Since the pandemics onset, we have taken two steps forward and one step back on several occasions. This is another one of those times. Corporate earnings for 2021’s first two quarters exceeded expectations and stock prices followed upward. During the third quarter, however, we saw the economy, earnings, and stock market slow down. It happened suddenly, but it is nothing to be alarmed about from our long-term investment perspective.

    A visit to your local grocery store provides a telling picture of what is going on — some shelves are sparsely stocked and more customers are wearing masks.

  • Letter From Cobleskill - Fall 2021

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Earlier this year, with COVID-19 cases on the decline and federal stimulus checks in hand, consumers rushed back into the marketplace — buying homes and cars, taking vacations, and attending all sorts of events. This was great for business. Sales were up, corporate profits jumped, and stock prices rose along with them. Until companies just could not keep up.

The reason is when the economy shut down, so did production lines. Then, when consumer demand exploded, manufacturers could not ramp up fast enough or find the employees they needed. Demand is simply outpacing supply. For example, automakers cannot obtain the semiconductors they need to build cars. Homeowners looking to upgrade appliances often cannot find what they need. As a result, people are suddenly spending less.

At the same time, businesses dealing with staffing shortages are reducing hours, further dampening sales. And now the upswing in COVID-19 cases is sending more people back into the safety of their homes and impacting restaurant seatings, air travel, and other elements of the mobile economy. Combined, these economic disruptions have forced some companies to downgrade their earnings estimates and this has slowed stock market growth.

What the fall has in store for us is impossible to predict — and certainly we are concerned about the resurging health impacts of the virus — but in our view the long-term outlook remains bright. Demand for consumer products is still high and the supply chain kinks should get straightened out. Quality businesses typically adapt, continue to grow, and should be bigger and more profitable five years from now than they are today.

We believe this bodes well for the FAM Funds. Our research team seeks quality companies with solid financial footings that we think are ideally positioned to weather any storm and deliver strong results over time. We focus not on the random, day-to-day, short-term turbulence in the economy or market, but on the businesses behind the stocks.

Have there been some unanticipated changes in recent weeks? Sure. But they do not alter our long-term vision. We believe we will take another two steps forward … And the shelves will once again be completely stocked.

Announcing a transition

Fenimore Founder and Executive Chairman Tom Putnam built the framework for a long-term succession plan many years ago to ensure continuity of experience and investment philosophy for years to come. I am pleased to announce the latest step in this plan.

Longtime Fenimore Investment Research Analyst Marc Roberts has been named as a Portfolio Manager of the FAM Value Fund. Marc served successfully in the same role for the FAM Small Cap fund from 2012 to 2016 before relocating to Chicago. He returned to us last year and quickly re-established himself as a key member of our research team. Marc joins me and Drew Wilson in managing the fund.

At the same time, Tom has announced that he will transition away from being a portfolio manager on our funds at the end of 2021 to concentrate fully on his Executive Chairman role. He will continue to be a mentor and an active participant in our research process and strategic direction. The rest of our fund management teams, including those of us who have led these teams for several years, will remain in place. Paul Hogan and Will Preston manage the FAM Dividend Focus Fund and Andrew Boord and Kevin Gioia the FAM Small Cap Fund.

We look forward to continuing Tom’s well-established tradition of collaborative, team management of the FAM Funds and to working diligently every day as we seek to grow your wealth over time.

Lets connect

We value the personal connections we have with our shareholders. You can reach us with any questions at 800-932-3271, through the contact us section of our website, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill office or via Zoom.

We hope to hear from you soon. Thank you for your continued confidence in us.

Sincerely,
John D. Fox, CFA
CHIEF EXECUTIVE OFFICER

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Meeting with Management: Getting Informed and Building Relationships

Written by Rachel Crisafulli on . Posted in Insights, Investment Insights, Uncategorized.

Meeting with Management: Getting Informed and Building Relationships

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    By: William Preston, CFA®
    Portfolio Manager – FAM Dividend Focus Fund

    Ever since Tom Putnam established Fenimore in 1974, he has maintained the practice of getting out from behind the desk and meeting in-person with management teams, a key tenet of Fenimore’s research process.

    Why do we do it? There are a few factors that support Fenimore’s longstanding belief that face-to-face meetings are a best practice including learning the business better, getting a bigger picture view and building relationships.

    Today, our entire research team is responsible for conducting in-person meetings annually with our portfolio companies with the purpose of achieving the following:

  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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  1. Understanding the business better. Many companies communicate their investment thesis through scripted conferences and regulatory filings. However, our in-person meetings give us a much better feel for how the business is managed, how employees are treated and other intangibles, like a great culture, that truly make the business exceptional. These meetings also help increase our conviction to hold onto an investment when the markets become volatile or the stock begins to look expensive, a practice that has served us well throughout our history.

  2. Learning out of the office. While truer in the early days when there was no internet, getting out of the office often grants broader insights about the economy and market environment. Our research team interacts with businesses and management teams in a variety of settings, including at company HQs, store locations, warehouses, distribution centers, manufacturing facilities, industry trade shows and investment conferences, which help provide diverse perspectives.

  3. Building relationships over the long-term. In a world where it is becoming harder for active managers to differentiate themselves, by connecting in-person every year management teams often get an appreciation for Fenimore’s shared long-term investment horizon. This distinguishes us from many short-term investors and traders that are worried about quarterly earnings numbers as opposed to long-term value creation.

Fenimore’s trips to AHR Expo, an annual HVAC (heating, ventilation, an air conditioning) industry trade show, provide a great example of the in-person value we seek to create. Over the years, we have made a number of investments in the HVAC industry and this conference provides an efficient way for us to talk with all of our portfolio companies in this industry, as well as their competitors, suppliers, and customers.

At the last expo, we gained a better understanding of how powerful the tailwind of sustainability through reduced energy consumption will be for the industry.  We also learned that several companies believed consolidation will continue, particularly as foreign companies try to buy their way into the US market to bypass the tremendous barriers to entry.

While the pandemic has temporarily changed the way we interact with management teams, the industry has done a great job adapting to a virtual world, which has enabled us to continue to have valuable face-to-face engagements with existing and potential investments. Most important, you can be assured that the Fenimore team is eager and planning to get back out on the road and resume in-person meetings as soon as possible.

It is this direct connection, and industry understanding that Fenimore has embraced for nearly 5 decades – a tradition we expect to remain for generations to come.

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FAM Dividend Focus Fund: 6 Key Lessons Learned

Written by Spiral Design on . Posted in Featured News & Insights, Insights, Investment Insights.

FAM DIVIDEND FOCUS FUND:
6 KEY LESSONS LEARNED

FAM DIVIDEND FOCUS FUND
25 YEARS OF INVESTING IN DIVIDENDS

As we celebrate 25 years of service to our shareholders, we’re pleased to provide an insight into 6 Key Lessons Learned along the way that have helped contribute to the Fund’s long-term success.

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6 key Lessons Learned

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25 Years of Distinctive Dividend Investing

Written by Spiral Design on . Posted in Insights, Investment Insights.

25 Years of Distinctive
Dividend Investing

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    Dividend investing has been around for over 100 years, but for the last 25 years Fenimore Asset Management has been implementing its own style of dividend investing through the FAM Dividend Focus Fund by investing in the growth potential of the dividend over the long term versus its current yield.

    Much has changed since 1996, when the 10-year Treasury was at 7%1 and money market funds would pay investors 5%.

    Finding Growth in Dividends

    And even the Fund’s name has changed in that time, but what has not changed is the return potential from investing in dividend-paying mid-cap companies that are on a growth trajectory.  The FAM Dividend Focus Fund Co-Managers evaluate every business in order to determine if it is best in class and can grow for years to come. Together they analyze whether the management team is strong and ethical, and why clients want to do business with the company to build the case for growth.

  • Image of Albany Skyline

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“We kiss a lot of frogs to find the right businesses,” noted William Preston, Co-Manager. “We are looking for that company to be the best holding over the next five to 10-plus years. It’s truly an unrelenting focus on quality and it is one of the things we don’t compromise on.”

The Intrinsic Value of Dividends

But what value do dividends really add? Going back all the way to 1926, dividend income has constituted more than 30% of the monthly total return of the S&P 5002, according to analysts. At Fenimore, the dividend growth focus allows the team to determine not only whether a company is growing, but also creates guard rails around managements’ capital allocation. This trusted Fenimore strategy is dividend focused with a growth filter.

Since inception the FAM Dividend Focus Fund has produced 9.62% annualized. To see the full track record, click here. To learn more about how the FAM Dividend Focus Fund could add value to your portfolios contact us.

1Factset. 10 year was as high as 7%.
2S&P Dow Jones Indices, “DIVIDEND INVESTING AND A LOOK INSIDE THE S&P DOW JONES DIVIDEND INDICES” September 2013

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Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

Key Reasons Why Fenimore Avoids Short Squeezes

Written by Spiral Design on . Posted in Investment Insights.

KEY REASONS WHY FENIMORE
AVOIDS SHORT SQUEEZES

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    February 1, 2021

    By Andrew Boord, Portfolio Manager – Fenimore Small Cap Strategy

    There is much discussion lately about highly shorted stocks getting squeezed higher, like GME (GameStop Corp.) — not a Fenimore holding.

    • Short-Selling Basics: A short seller expects a stock price to decline. First, they borrow someone else’s shares and sell them at the market price. Later, they must return those shares to the rightful owner by going into the market to buy the same number of shares back (known as “covering”). If the stock price falls between the sale and the cover, then they earn a profit.

    • Short Squeeze: A short squeeze can occur when a security has a relatively high, short interest. If other market participants buy shares pushing the price higher, the losses for short sellers can become extremely painful and cause the shorts in turn to buy more shares to cover their short positions. A squeeze is wave after wave of short sellers forced to buy shares to cover their shorts at higher and higher prices.
  • Andrew Boord

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  • Short Interest & GME: Short interest is usually measured by “days to cover,” which can be defined as the number of shares shorted divided by the average volume. GME was particularly vulnerable because the short interest was massive versus average volume. As a result, once the squeeze begins, the short interest struggles to buy enough shares to cover.

  • Recurring Trend: While GME is an amazing episode that the marketplace is watching carefully, short squeezes are a recurring trend in market history.

  • Key Reasons Why Fenimore Avoids Short Squeezes:
    – Short squeezes almost always end with the stocks returning to their approximate starting levels.
    – Even as investment professionals with decades of experience, we never know exactly what catalyst drives a stock price over the short term. That is why we believe that investing with extensive research and knowledge, and a long-term perspective, is mission critical to managing risk and growing capital.
    – Fenimore does not speculate with our investors’ hard-earned assets. We are dedicated to protecting our investors’ capital and see these market anomalies as interesting to watch, but critical to avoid.
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“America’s Small Stocks Are Leading the Market’s Charge”

Written by Spiral Design on . Posted in Investment Insights.

“America’s Small Stocks
Are Leading the Market’s Charge”

December 18, 2020
 

“America’s Small Stocks Are Leading the Market’s Charge” – The Wall Street Journal published this noteworthy article on 12/13/2020. Here are our key takeaways:

  1. Small businesses and our economy = Small-cap stocks tend to do well in a recovering economy. The promise of COVID-19 vaccines has driven expectations for an improved economy and resuscitated industries that have suffered significantly in 2020.

  2. A record month = The Russell 2000 Index, comprised of small businesses, just recorded its best month ever in November. And it has continued to perform well in December.
  • According to the article, “The Russell 2000’s gain for the year surpassed that of the S&P 500 on Tuesday for the first time in 2020, according to Dow Jones Market Data.”
  1. Attractive stock prices = Even with this record performance, the overall prices of small-cap stocks are reasonable – especially when compared to their large-cap counterparts.

Is it time to give small-cap stocks a fresh look? Discover Fenimore’s small-cap strategy and what makes us different.

Learn more

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2020: Lessons Learned & Our Outlook

Written by Spiral Design on . Posted in Investment Insights.

2020: Lessons Learned
& Our Outlook

January 20, 2021
 

Lessons Learned

Our lessons learned in 2020 would take up volumes, but there is an axiom that was strongly confirmed: The stock market is not the economy.

  • Because the market is a discounting mechanism, there is often a disconnect between the performance of stocks and the current economic environment. In 2020, that disconnect became a gaping chasm with the market reaching several new highs despite GDP and employment figures that rivaled the Great Depression.

Our Outlook

  • Though the initial rollout of the approved vaccines is moving slower than expected, increased immunization and a second stimulus package should support, if not accelerate, a return to more normal economic activity.
  • Even more, some industries may experience catch-up demand that could lead to periods of over earning that would be dangerous to extrapolate.

Read Fenimore’s Q4 Commentary

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Our research team will continue to take the long view and look for opportunities to invest more in what we believe are quality businesses — both among our current holdings and in enterprises we’ve admired and desired to own but were too richly priced for us.

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