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John Fox

Investor Update — May 2022

Written by Wright Design on . Posted in Investment Insights.

Investor Update — May 2022

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    As we came into the new year, the consensus was that the U.S. economy and earnings of American companies would grow. Perhaps at a slower rate than 2021’s pace, but still grow. It was also well understood that the Federal Reserve (“the Fed”) would be reducing the stimulus put in place at the pandemic’s onset, meaning they would increase short-term interest rates to cool off the rate of inflation.

    As 2022 is unfolding, two events have increased the rate of inflation and forced the Fed to act quicker and, perhaps, with more intensity than previously expected.

    1. Russia’s invasion of Ukraine has put upward pressure on energy and food costs. Russia is one of the largest producers of oil in the world and a large share of the world’s wheat supply comes from the Russia/Ukraine region. The inflation report released this morning (5/11/2022) shows significant year-over-year increases in both energy and food costs.

    2. China’s zero-COVID policy is resulting in factory and port closures there. As China is a major exporter of parts and finished products, these closures are causing American businesses to scramble to obtain products they need. In many cases, they are paying significant premiums for airfreight or other logistics options. To cover these transportation costs, domestic companies may pass them on to their customers in the form of higher prices.
  • CEO John Fox, CFA

    CEO John Fox, CFA


    “I want to contrast this with Fenimore’s holdings which, in our opinion, are competitively advantaged firms with significant cash profits and reasonable levels of debt. No matter what happens in the economy or markets, financially strong companies can weather the storm.”
    John Fox, CEO

One of the potential outcomes of higher interest rates and energy costs is that they slow the economy so much that we experience a recession.

You have heard us say that stock prices follow earnings and, in a recession, it is normal for company profits to decline. The stock market is trying to figure out if we will have a recession and, if so, when. Of course, no one knows the answer and this is creating volatility in stock prices. The one thing we do know about recessions is that they end and a new cycle of growth begins.

Corporate Profits

An interesting aspect of the current “recession watch” is how strong corporate profits are today. Our Investment Research team recently finished digesting a couple hundred earnings reports for the quarter ended March 31, 2022. Earnings continue to grow and, in some cases, companies have reported record results. In cases where earnings are down, it is usually due to temporary factors like elevated transportation costs. We don’t know if there will be an overall decline in earnings at some point, but we are watching results carefully.

Additionally, our analysts continue to travel and meet with our holdings’ management teams — we just visited two in Dallas and Richmond — to ensure that we have our finger on the pulse of their operations.

  • A noteworthy point: Some of the largest declines in the stock market this year are from speculative companies that may not be profitable, generate cash flow, or have an established business model. I want to contrast this with Fenimore’s holdings which, in our opinion, are competitively advantaged firms with significant cash profits and reasonable levels of debt. No matter what happens in the economy or markets, financially strong companies can weather the storm.
Looking Ahead

During these uncertain times, we can tell you with certainty that we remain committed to Fenimore’s investment philosophy and tenets that have successfully guided us through difficult times in the past. We believe that our holdings will partake in future growth because their management teams are focused on shareholder interests and they possess strong financial footings to help them endure the current decline and prosper when the markets recover.

We’re Here for You

Please contact us with any questions or concerns at 800-721-5391, through our website’s “Contact Us” section, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill location or virtually.

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Letter From Cobleskill spring 2022

Letter From Cobleskill: Spring 2022

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

Letter From Cobleskill: Spring 2022

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    Dear Fellow Shareholder,

    As I write this, our thoughts and hearts are with the people of Ukraine. May our world leaders soon find a path to peace.

    After a terrific 2021, the stock market has dropped 10% to 20%, depending on the index, since the beginning of 2022.1 The war in Ukraine has certainly played a role, but that is not the only reason in our view. As we entered the year, stock valuations were stretched and this left stock prices at an all-time high and susceptible to decline. Additionally, the inflation that began gripping our nation late last year has proven to be more firmly entrenched than originally believed.

    Inflation has led to decreased consumer spending as higher prices on essentials like energy and groceries are forcing many people to cut back on discretionary spending (such as vacations and entertainment). As the first quarter ended, the Federal Reserve was beginning the gradual and delicate balancing act of trying to raise interest rates enough to further slow spending — and inflation — but not so much as to trigger a recession.

  • Letter From Cobleskill spring 2022

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As long-term investors, it is always helpful to remember that stock market downturns are part of the experience. I have been at Fenimore for 26 years and in every one of those years but one, the market had a decline of 5% or more at least once during the year. This is a normal part of stock investing and, while some uncertainty lies ahead, we see no reason for panic.

First, the current downturn started when our economy was in a position of great strength with consumer spending and corporate earnings at record highs. This is helping to cushion the fall. In addition, interest rates, while rising, are still low by historical standards.

At the same time, what reassures us the most about the days ahead is what our research analysts are hearing directly from the individual companies in which we invest. In recent months, we have met with dozens of businesses to discuss the health of their operations and their roadmaps to growth. While there are certainly challenges (global supply chain problems and elevated transportation prices will be with us the rest of the year), these executives are far from pessimistic.

They intend to grow, reinvest, make acquisitions, and return profits to shareholders in the form of stock buybacks and increased dividends — maybe not to the degree we thought possible three months ago, but certainly at what we consider healthy levels. Overall, these leaders reported that order backlogs are robust, business remains good, and profit margins, while down, are still expected to allow for growth-related activities. We are confident in the collection of businesses in our funds.

Fenimore continues to invest toward a return to “normal.” This means focusing on quality companies that meet our rigorous standards and have the ability, in our opinion, to weather the challenging times and excel when the environment is better. We have made slight adjustments in the funds with an eye on strengthening positions in well-managed, reasonably-priced businesses that may be experiencing short-term pressures, but that we believe should be stronger three years from now. Similarly, we reduced our stakes in companies whose prices peaked in our view and whose long-term prospects are not as favorable.

A DECADE OF DILIGENT MANAGEMENT

Fenimore is proud to celebrate the 10-year anniversary of our FAM Small Cap Fund (FAMFX). Our team is pleased with the performance we delivered for shareholders over that time while seeking to mitigate risk. Under the direction of Portfolio Managers Andrew Boord and Kevin Gioia, we pursue quality, solidly profitable, and sustainable small-cap companies with long-term growth potential. Congratulations to Andrew and Kevin and the entire investment research team! We also thank everyone who is invested in FAMFX and look forward to the next decade.

LET’S CONNECT

We value our personal connections with shareholders. You can reach us with any questions at 800-932-3271, through our website’s “Contact Us” section, or via info@fenimoreasset.com. Our team also welcomes you to meet with us in either our Albany or Cobleskill location or virtually.

Sincerely,
John D. Fox, CFA
CHIEF EXECUTIVE OFFICER

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1 FactSet, as of 3/18/2022

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Research on The Road: Face-to-Face Meetings

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

RESEARCH ON THE ROAD: FACE-TO-FACE MEETINGS

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    By John Fox, CFA®
    CEO

    After two years of limited travel, Fenimore’s investment research analysts are back in full swing meeting with management teams in person at their headquarters, conferences, and industry events. During the last month, we met with a couple dozen companies. While there are certainly challenges, executives are not pessimistic.

    Insights from Our Travels

    • Banks: Banks seem encouraged by the financial strength of their customers and the expected increases in short-term rates by the Federal Reserve. Banks expect they’ll be able to increase net interest margins — the difference between interest paid and received — as a result.
  • Andrew Boord, Portfolio Manager - Fenimore Small Cap Strategy

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  • Insurers: Insurance premium rates continue to increase which is good for the profits of our insurance holdings. With increasing inflation and a war in Europe, it is widely appreciated that it is a risky world which increases demand for insurance.

  • HVAC Companies: The industry is undergoing regulatory changes over the next three years that will lead to significant redesigns of product lines. This will be an enormous engineering challenge, but historically this has led to higher prices on AC units as well as higher profits. We believe this should be a tailwind while customers should receive increased energy savings due to technological advancements.

  • Software Firms: We met with a handful of software companies that sell to financial institutions. The outlook for the year continues to be mid to high single-digit growth in revenue and we are confident in the ability of our holdings’ leaders to navigate current challenges.

  • Earnings Growth: It is clear that the global supply chain problems and elevated transportation prices will be with us the rest of the year. At this point, we continue to expect companies to grow earnings over 2021 levels, but at a slower rate than we anticipated at the beginning of the year. We also expect our holdings to generate cash profits to invest in growth and return to shareholders through stock buybacks and increased dividends. A skilled management team is often crucial to a good investment experience.

Fenimore’s firsthand, in-depth research helps us know our holdings well and this gives us confidence as we seek to protect and grow your capital over the long term. We hope our research insights from these face-to-face meetings give you assurance too.

Please call us at 800-721-5391 if we can assist you. Thank you for your ongoing trust.

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2022 Stock Market Update

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

2022 STOCK MARKET UPDATE

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    By John Fox, CFA®
    CEO

    After a terrific 2021, the stock market peaked on the first business day of the new year and has been declining ever since. So far, stocks are down 10% to 20% for the year depending on the index you watch.[1] The stocks of smaller companies have fallen the most.

    While the current headlines are on Russia’s invasion of the Ukraine, we believe this is just one of multiple reasons for the drop in stock prices. As long-term stock investors, it’s always helpful to remember that price declines are part of the experience. I mentioned in a recent video we distributed that I have been at Fenimore for 26 years and in every one of those years, but one, the market had a decline of 5% or more during the year. This is a normal part of stock investing.

  • John Fox

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Of course, the reasons for the declines are always different. Today, we see three primary reasons:

1) High Valuations: After great market returns in 2021, stock valuations were at a high level. Because of low interest rates and many years of terrific returns, investors were willing to pay more for a dollar of earnings. This left stock prices at an all-time high and susceptible to a decrease as we turned the calendar. It’s impossible to know when a decline might occur, even if you think prices look high.

2) High Inflation: It’s very clear that inflation is not “transitory” using an often-quoted word from the Federal Reserve Chairman. We believe some parts of inflation will recede over time; other factors are here to stay. As a consequence, the Federal Reserve will be raising interest rates this year beginning at their March meeting in a few weeks. Answers to important questions like how high these rate increases will go and how fast they will occur are unknown. Interest rates have already moved up in anticipation of the Fed’s moves. The 30-year mortgage rate has increased from last year’s low of 2.67% to 4% today.[2] We should point out that while the Fed is raising interest rates, they remain low by historical standards.

3) Russia’s Invasion: Russia’s invasion of Ukraine creates a lot of uncertainty around politics and Europe’s state of affairs. From a purely economic point of view, Russia is a major producer of oil and other commodities like wheat. If this conflict continues, it may increase the prices of these commodities which will impact inflation. Higher inflation brings us right back to the previous point about an interest rate increase.

As you can see, there are a number of interrelated issues. However, even if it seems like one storm ends and another surfaces, this is usually the story in economics, politics, and markets. We have been through numerous international events like the Asian financial crisis in 1998 and two wars in Iraq.

Looking Ahead

At this time, we expect companies to grow earnings over 2021 levels and generate cash profits to invest in growth and return to shareholders through stock buybacks and increased dividends. As I stated in our year-end newsletter, “You don’t have to know the future, but you do have to know your companies.”

This gives us the confidence we need to execute our long-term strategy: investing in what we believe are quality businesses that meet our rigorous financial standards with strong leadership teams that can create value for our investors over time.

Please contact us at 800-721-5391 if you have questions or concerns. Thank you for the opportunity to serve you.

[1] FactSet as of 2/24/2022

[2] https://fred.stlouisfed.org/series/MORTGAGE30US

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