by Paul Hogan, Co-Manager - Fenimore Dividend Focus Strategies
People are sometimes surprised when they don’t find any of the household-name “FAANG” technology companies — Facebook, Amazon, Apple, Netflix or Alphabet (formerly known as Google) — in Fenimore’s investment strategies.
In our view, they are good businesses doing even better since the start of the pandemic as we all find ourselves spending more time in front of numerous screens. No one can be sure whether this FAANG (+Microsoft) boom in their stock prices will hold or lose its grip when the pandemic eases. These are the largest corporations in the U.S. per their market capitalization (minus Netflix) and are followed by countless investment firms.1
Fenimore concentrates on the small- and mid-cap space where:
• Fewer mainstream investment analysts spend their time
• There is a greater likelihood to find quality opportunities at discounted prices
• We have better access to management
Fenimore’s Technology Holdings
We have a number of technology holdings. Not simply because of the sector or industry they are in, but because, first and foremost, they meet Fenimore’s quality standards.
Just consider our FAM Dividend Focus Fund (FAMEX):
• Several of FAMEX’s holdings are in the Information Technology sector — it is the Fund’s largest sector exposure at 32%.2 This technology percentage is even higher than the S&P 500 Index’s 27%.3
• FAMEX owns eight tech firms including a data center real estate company. Four of these businesses have been held for more than five years. During that time frame, these four names had an average compound annual growth rate, or rate of return, of more than 22% and outperformed the stock market considerably (past performance does not indicate future results).4
• Overall, FAMEX’s tech holdings have been performing quite well during 2020. In fact, all have maintained or raised their dividend.5 In our experience, this indicates that they continue to generate significant cash flow, are financially sound, and have confidence in their long-term outlook.
• The technology names held in FAMEX are involved in semiconductors, Cloud computing, 5G networks, Artificial Intelligence, Autonomous Driving Vehicles, data centers, FinTech (financial technology), and hardware/software/security solutions.
Instead, we were looking at high-growth semiconductor uses like Cloud computing, Autonomous Driving Vehicles, data centers, 5G networks, and Artificial Intelligence. I continue to believe that semiconductors should be a significant economic growth engine and a good investment over the next 5 to 10 years.
Today, semiconductors and the rest are represented — and representing well — in our considerable technology holdings.
Fenimore’s portfolios are structured with a long-term mindset. We’ve staked our business, and our investors’ futures, on well-capitalized, low-debt companies that are designed and managed to navigate all market cycles and build wealth over time.
Our investment approach often looks past the high-gloss, high-profile companies to uncover under-the-radar, small- and mid-sized businesses that meet our rigorous quality criteria. These are companies we deeply understand with leadership teams we know well and talk with often — managers who inspire the confidence and conviction we need for long-term investment (especially during down markets).
As important, we aim to invest in these firms at a reasonable price to build in a margin of safety to protect to the downside. Even great enterprises can be poor investments if the price paid is too high.
Fenimore’s Research Team will continue to analyze both macro- and company-level data carefully for existing holdings and those we are considering. If stock market volatility picks up again, we remain ready and eager to invest in quality businesses at a margin of safety.
As always, please call 800-721-5391 to speak with one of our associates. Or, if you’d prefer to talk “face-to-face” via Zoom, please let us know. Thank you.
1 FactSet as of 6/30/2020
2 Morningstar Direct as of 6/30/2020
3 S&P Dow Jones Indices as of 6/30/2020
4 FactSet as of 7/24/2020 – previous 5 years (includes Digital Realty Trust that owns large data centers and profits are driven by technology spending)
5 FactSet as of 6/30/2020