by Drew Wilson, Co-Manager - Fenimore Value Strategies
These challenging times continually reinforce why we believe it is as important as ever to invest in quality businesses with strong and adept management — leaders who can navigate short-term conditions to create long-term success.
In the two weeks since our last update, U.S. equity markets have been caught in a three-way tug of war between:
- Resurgent COVID-19 cases
- The prospects of new government fiscal and monetary stimulus
- Souring China/U.S. relations
After the stock market increased as much as 5.5% over the past two weeks (per the S&P 500 Index), fears that a surge in new virus cases will prolong our economic recovery wiped away the gains.
We’ve been watching the rise in cases in states that reopened early or had more relaxed rules. This includes Arizona, California, Texas, and Florida. Last week, positive cases in these states rose dramatically.
While some of this was expected due to expanded testing, the positivity rate or percentage of tests that were positive increased sharply. To avoid another shutdown, these states are pausing or rolling back some reopening measures which could further delay our economic recovery.
On March 16, Fenimore’s CEO John Fox wrote, “In our view, the key milestones to watch out for are a slowing in the number of new coronavirus cases and, then, the ability for people to resume normal living.” We are still watching for these milestones as well as monitoring the development of therapies and vaccines. At the same time, it’s clear that this is going to take more time than many had thought.
Volatility = Opportunity
We used the volatility that swept the markets between February and April to, in our opinion, improve the overall quality of our holdings. For instance, in our three mutual funds, we purchased shares in 11 new companies and increased our ownership in many others while trimming or selling our shares in businesses with too much debt or whose prospects were dimmed by the pandemic. To be sure, the decline in stock prices and ensuing recovery were so swift that we didn’t do everything we had wanted, but our Investment Research Team is very pleased with how our portfolios are now positioned.
We were able to act quickly because of the depth to which Fenimore’s analysts know the companies we own and, importantly, our preparedness in maintaining a list of firms whose stock we’d like to purchase at the right price (our “idea inventory”). Should the recent resurgence in virus cases result in more volatility, we will follow the same playbook.
This week brings the close of the reporting quarter for many companies, which means a new “earnings season” is once again upon us. Businesses will be reporting their financial results for the period from April 1 to June 30. They will also provide their outlook for the coming months and quarters. For us, earnings reports are always interesting, but this earnings season is even more so because we should be able to gauge the pace of the nascent economic recovery from many different angles.
Our analysts will also be monitoring how our holdings’ management teams are positioning their firms to come out on the other side of this recession even stronger and in a better competitive place. For instance, we recently analyzed earnings reports from two of our investments:
- The first, a used-car purveyor, had poor results in our view. This was expected because many of their stores were closed in March and April. However, this crisis has forced them to rapidly accelerate their rollout of digital purchasing and home delivery capabilities. Now, in many states you can have your trade-in appraised, buy a car, finance the car, and have the car delivered to you all from your phone. While some still like to test drive and kick the tires, many people prefer to buy their car “virtually” these days — and this is something that almost none of their competitors can offer.
- The second, a leader in spices and condiments, had impressive results, in our opinion, as the lockdown forced more home cooking. While slower sales to restaurants was a headwind, many people tried products such as flavor packets in their home cooking, which they may not have done under “normal” conditions. Some of this new demand will likely moderate as we normalize and return to restaurants, but this business has certainly expanded their customer list.
Fenimore’s Research Team will continue to analyze both macro- and company-level data carefully. If stock market volatility picks up again, we remain ready and eager to invest in quality businesses at discounted prices (a margin of safety).
As always, if you’d like to speak with one of our associates, please call 800-721-5391 or email us.
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Thank you for your ongoing trust.
 Bloomberg, as of 6/26/2020