US Equity Strategies


Pembroke’s US growth portfolios rose modestly in the third quarter of 2021, building off an impressive first half of the year. Portfolio performance was ahead of its benchmark index, the Russell 2000. Strong stock selection in the information technology and industrial sectors helped drive the absolute returns, while favourable stock selection in the healthcare sector contributed meaningfully to performance relative to the Russell 2000.

The investment team’s decision to have no energy stocks and to be meaningfully underweight the financial sector served as mild headwinds. Generally, the past three months saw profitable companies outperform their loss-making peers. Furthermore, heavily shorted stocks, which enjoyed a strong start to 2021, came back to earth relative to less controversial companies.

Pembroke seeks businesses that meet its parameters for growth, balance sheet strength and shareholder alignment, while maintaining a watchful eye on valuation. At the same time, the firm has a history of ensuring its portfolios maintain adequate industry diversification and are not dependent on a single market theme or trend.

Despite growth stocks having meaningfully underperformed value stocks in 2021, Pembroke’s balanced and measured approach has yielded solid results. Growth stocks, after all, are not only found in the technology and healthcare sectors. The investment team has seen positive contributions from holdings across a range of industries in 2021, from homebuilding, to online advertising and to executive training. We approach the future with an ongoing commitment to investing in exciting growth companies complemented by reasonable industry diversification and portfolio-level valuation discipline.

Two positions were significant contributors to performance in the third quarter of 2021

Informational technology consultancy Perficient (“PRFT”) has been a beneficiary of spending on digital transformation initiatives, a process which involves modernizing front and back-end technology systems for an increasingly online world. Strong customer demand was reflected in the company’s 21% year-over-year organic growth rate in the second quarter of 2021, up from 10% just a quarter earlier. Rising revenue is helping the company leverage its fixed costs, leading to expanding profit margins. Perficient is also moving more work to offshore delivery centres, which operate at higher profitability levels. Finally, prudent M&A is helping build the company’s near-shoring capabilities in countries such as Colombia. Perficient’s growing pipeline of new projects, increasing contract sizes and free cash flow underly Pembroke’s decision to maintain the company as a top-five holding in its US portfolios.

SPS Commerce (“SPSC”) connects vendors of products to retailers, facilitating inventory, ordering and compliance. The company’s established integrations into large retailers allow its customers to reduce back-office staff and quickly bring on new relationships. The pandemic drove increased demand for SPS’s services, which reduce the need for manual data inputting by office-based employees. Customers are also coming to SPS for more products, including dropship, curbside pickup, and ship-to-store capabilities. The company is also growing its addressable market by launching products that integrate with online platforms, such as Shopify and BigCommerce. Essentially, the explosion of omni-channel sales is a significant boon to revenue and profitability, with management pointing to an above 15% revenue growth in the long term, up from only 10% guidance prior to the pandemic. Management also continues to stand behind its target of 35% EBITDA margins in the next few years, up from approximately 27% today. While SPS shares have had an impressive run, the accelerating growth profile, high-recurring revenue, net cash balance sheet and rising profit margins justify the expanding valuation.

Two stocks were significant detractors to performance in the third quarter of 2021

Stoneridge (“SRI”) stock came under continued pressure this quarter as the automotive industry’s ongoing semiconductor and broader supply chain constraints led to a disappointing earnings report. Although the company did not provide an intra-quarter update, monthly sales data and auto manufacturer updates on future production expectations indicate that earnings expectations for 2021 and 2022 are too high. That said, long-term demand for cars and trucks remains steady, and SRI’s position as a provider of advanced safety, communications and electronics systems is improving. SRI has one of the best growth profiles—coming out of the current supply chain challenges—of any major North America automotive parts supplier. We remain focused on the company’s long-term growth profile and its competitive position, and we believe SRI maintains sufficient balance sheet strength to weather this storm.

Shares of Ollie’s Bargain Outlet (“OLLI”), a US-based discount retailer, declined during the past quarter along with those of many discount and dollar stores. Investors fear that the combination of difficult comparisons versus last year’s stimulus-driven sales, combined with rising freight and labour rates, will lead to weak earnings for the sector participants. While Ollie’s does face difficult headwinds in the short term, its differentiated concept should allow it to raise prices to protect its profitability, while still offering competitive prices. The company also believes the supply chain disruptions are leading to buying opportunities of closeout merchandise. With compelling long-term fundamentals and a debt-free balance sheet, the company is continuing to open new stores. Lastly, with its stock trading at the cheapest multiple since going public in 2016, Ollies’s is also buying back its own shares.



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This report is for the purpose of providing some insight into Pembroke and the Pembroke funds. Past performance is not indicative of future returns. Any securities listed herein, are for informational purposes only and are not intended and should not be construed as investment advice nor is it a recommendation to buy or sell any particular security. Factual information has been taken from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Pembroke seeks to ensure that the content of this document is correct and up to date but does not guarantee that the content is accurate and complete and does not assume any responsibility for this. Pembroke is not responsible for decisions or actions taken or made on the basis of information contained in this document.