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.
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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.
“America’s Small Stocks Are Leading the Market’s Charge”
December18,2020
“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:
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.
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.”
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.
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.
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.
Paul Hogan, Co-Manager of the FAM Dividend Focus Fund (FAMEX), explains the investment philosophy behind the fund — a philosophy that led Barron’s to call Paul the fund manager that “has beaten 99% of his peers” over the past half-decade (12/4/19).
Fenimore Small Cap Strategy Portfolio Manager Andrew Boord discusses how our team’s hands-on management drives our ability to “stress test” banks during COVID-19 and evaluate their place in our portfolio. This video is excerpted from our “Fenimore Talks” event, held in partnership with the University at Albany.
Fenimore CEO & CIO John Fox says no one can predict the future, that’s why it’s imperative to “own businesses that can do well no matter the environment.” This video is excerpted from our “Fenimore Talks” event, held in partnership with the University at Albany.
Tom Putnam, Founder & Executive Chairman, discusses how Fenimore’s focus on quality businesses, stress-tested investment process, and professionals prepared us for the pandemic.
We think so. As always, we’re in close contact with the leadership of the companies we invest in — and we like what we’re hearing and seeing. CEO John Fox elaborates in our 2020 Year-End Newsletter.
