Fenimore Asset Management has published its investor letter for the fourth quarter of 2025. The document is available for download. In 2025, the stock market showed strength but experienced volatility. Investors navigated enthusiasm for artificial intelligence, economic uncertainty, and monetary policy concerns.
A summer rally was fueled by AI-related spending and economic resilience. The fourth quarter saw increased market volatility due to valuation pressures and macroeconomic uncertainty. Large-cap technology and communication services stocks led the market during the quarter, with the S&P 500 Index rising 2.66%. Fenimore believes the trend of AI stocks outperforming high-quality stocks is unsustainable.
Fenimore's Small Cap Strategy returned -4.12% in Q4 2025, trailing the Russell 2000 Index's return of 2.19%. Underperformance was driven by an underweight exposure to low-quality stocks. The Fenimore Dividend Focus Strategy declined -4.41% in the quarter, compared to the Russell Midcap Index's return of 0.16%. The Fenimore Value Strategy declined -1.17% in Q4, also compared to the Russell Midcap Index's 0.16% return. Investments in the financial and industrial sectors contributed to the strategy's relative underperformance.
The firm expects mixed market conditions in 2026. Many AI-related stocks appear expensive, while high-quality companies are trading at multi-year lows, which may create opportunities.
In its fourth-quarter 2025 investor letter, Fenimore Asset Management highlighted AutoZone, Inc. (NYSE:AZO). AutoZone was among the key performance detractors in the Fenimore Value Strategy during the quarter. AutoZone is a retailer of automotive replacement parts and accessories. Its one-month return was 2.16%, and its shares gained 7.34% in value over the last 52 weeks. On January 15, 2026, AutoZone stock closed at $3,465.45 per share, with a market capitalization of $57.64 billion.
Fenimore Asset Management stated the following regarding AutoZone in its letter: "Our top detractors to performance were BRO, AutoZone, Inc. (NYSE:AZO), and FAST. Despite the headwinds, we believe that their underlying business fundamentals remain strong. Despite solid revenue growth, AZO’s higher operating expenses and a substantial, non-cash LIFO inventory charge negatively impacted earnings. The opening of more than 140 new stores and investments in supply chain hubs were the sources of these costs. While these front-loaded expenses pressured quarterly margins, we see them as astute capital allocation for long-term market share gains, especially in its commercial segment."
According to a database, 60 hedge fund portfolios held AutoZone at the end of the third quarter, down from 65 in the previous quarter. In the first quarter of fiscal 2026, AutoZone reported revenue of $4.6 billion, an increase of 8.2% compared to the first quarter of 2025.