Market Update: 

EARNINGS, TARIFFS & MARKET DECLINES

WHAT CHANGED

A COMPANY-LEVEL VIEW
Fenimore is dedicated to identifying select, quality businesses that we believe can grow and produce attractive returns over time – businesses that can withstand the inevitable bumps of economic cycles and policy changes.

As our businesses reported earnings, most of the calls with management were dominated by questions about tariffs. As specific timing over the implementation of tariffs has been elusive, there were few definitive answers. Most management teams reassured investors that they could employ strategies similar to those used during the last major wave of tariffs. Broadly, there are three key approaches companies are using to mitigate the impact of tariffs:

1. Diversify sourcing strategies. In response to tariff increases during the Trump administration’s first term, many companies proactively restructured their supply chains to mitigate geopolitical risk. This shift was further expedited during the pandemic as businesses sought greater resilience. Floor and Décor (FND) exemplifies this transition—having sourced 50% of its products from China in 2018, the company successfully reduced that figure to just 16% by the fourth quarter of 2024.
2. Leverage supplier negotiations. Companies with strong competitive advantages and dominant market positions may have the bargaining power to compel suppliers to absorb a portion of the increased costs, thereby cushioning the impact of tariffs.
3. Adjust pricing strategies. Several management teams have indicated that price increases could serve as a direct offset to higher costs. However, the extent to which this strategy will be adopted—and whether it could contribute to inflation—remains uncertain.

IMPACT ON EARNINGS PER SHARE
If left unaddressed, tariffs may pose headwinds to corporate earnings. Among the earnings calls we’ve participated in, Zebra Technologies Corporation (ZBRA) was the only company to provide a precise dollar impact estimate. Without mitigation, they anticipate a $60 million hit to profits in 2025. However, after implementing various countermeasures—including the aforementioned strategies—they project the net impact will be reduced to $20 million, or approximately 2% of pre-tax profits.

On a broader scale, a recent J.P. Morgan report estimated that the implementation of the proposed tariffs could lower S&P 500 earnings per share (EPS) by approximately $16, representing a 6% reduction from current projections. If accurate and without further mitigation efforts, this adjustment would curb the index’s expected double-digit earnings growth to approximately 5%.

* Source: J.P. Morgan Equity Strategy & Quantitative Research, Factset

LOOKING AHEAD: Changing Times. Unchanging Principles.
We stick to our plan: only owning companies we understand deeply, with what we believe to be solid competitive advantages, profitability, and strong leadership. Our Research team remains busy and diligent with earnings calls, talking with management teams, and traveling for face-to-face meetings. We recognize it’s a fast-moving environment with a lot of change. We will provide an update in our next quarterly letters, going out in early April.

At Fenimore, we remain dedicated to the principles and philosophy that have seen us through many market cycles over the past 50+ years.

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.

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

Past performance is not indicative of future results. All investing involves risk including the possible loss of principal. Before investing, carefully read the fund’s investment objectives, risks, charges and expenses. FAM Funds’ prospectus or summary prospectus contains this and other important information about FAM Funds and should be read carefully before you invest or send money. 

To obtain a prospectus or summary prospectus and performance data that is current to the most recent month-end for each fund as well as other information, please go to fenimoreasset.com or call (800) 932-3271.

The principal risks of investing in the fund are: stock market risk (stocks fluctuate in response to the activities of individual companies and to general stock market and economic conditions), stock selection risk (Fenimore utilizes a value approach to stock selection and there is risk that the stocks selected may not realize their intrinsic value, or their price may go down over time), and small-cap risk (prices of small-cap companies can fluctuate more than the stocks of larger companies and may not correspond to changes in the stock market in general).

Neither this presentation nor any of its contents may be distributed or used for any other purpose without the prior written consent of Fenimore. 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. This presentation may contain statements based on the current beliefs and expectations of Fenimore’s management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. 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. 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.

FAM Small Cap Portfolio Manager Talks Valuations

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.