Canadian Equity Strategies

April 2025

 

For the most part, Pembroke’s Canadian strategies had a difficult first quarter. Canadian equity markets were buffeted by significant fears of tariffs and trade tensions. This situation resulted in a very wide dispersion of issuer returns across sectors, styles and size. Uncertainty over global trade policy also led to a freeze in corporate behaviour, and fears of a resulting economic slowdown.

In this environment, defensive sectors, particularly gold and precious metals, performed well, supported by strong underlying commodity prices. Conversely, growth-oriented sectors and investments struggled relative to their value-oriented counterparts. Individual security returns were also volatile, with some illiquid issuers coming under significant pressure from tariff and macroeconomic concerns.

CANADIAN GROWTH STRATEGY

Our growth-oriented strategy sold off significantly during the first quarter, underperforming broader market indices. The weakness was widespread, with only energy holdings in positive territory for the period. The portfolio’s weighting to growth companies contributed negatively, as did the sell-off in some large-cap holdings on concerns related to the impact of the trade conflict.

While the impact of tariff policies remains highly uncertain, Pembroke believes that its holdings are well capitalized. They are also managed by skilled and focused operators who are well equipped to navigate a challenging environment.

DIVIDEND GROWTH STRATEGY

Pembroke’s dividend strategy posted losses in the first quarter of 2025, after a strong 2024. Similar to the growth strategy, weakness in individual holdings was driven by tariff fears, general macro uncertainty and valuation compression.

However, the companies in the dividend strategy are resilient to macroeconomic and geopolitical shocks. In addition, the dividends of the companies in the portfolio are well covered by free cash flow, and their balance sheets are conservatively structured. Lastly, we believe that the portfolio’s valuations are not stretched relative to the long-term prospects of the underlying businesses.

CANADIAN ALL CAP STRATEGY

Pembroke’s all cap strategy led our Canadian equity strategies in the first quarter of 2025, posting modestly positive absolute and relative returns. The strategy’s precious metals holdings delivered strong gains as gold prices rose amid geopolitical and economic uncertainty. Investments in the energy and financial sectors also contributed to performance.

The strategy focuses on entrepreneurial growth and its targeted portfolio structure differentiate it from broader Canadian indices.

POSITIVE CONTRIBUTION TO THE STRATEGIES

On the positive side, shares of TerraVest Industries (TVK) rallied in the first quarter. TerraVest is a market-leading manufacturer of home heating products, propane, anhydrous ammonia and natural gas liquids, transportation vehicles and storage tanks, energy processing equipment, and fibreglass storage tanks. The company is led by a focused and entrepreneurial team with an impeccable track record of creating shareholder value through opportunistic acquisitions.

For instance, the market reacted very positively to the company’s acquisition of EnTrans, an industry-leading manufacturer of tank trailers, heavy haul trailers and liquefied petroleum gas transportation equipment. The acquisition is the largest in TerraVest’s history. It provides the company with a beachhead into new geographies, new product lines and cross-selling opportunities.

We believe the acquisition significantly extends TerraVest’s growth trajectory and that the stock remains attractive despite this recent move.

NEGATIVE CONTRIBUTION TO THE STRATEGIES

From a company-specific perspective, shares of Hammond Power Solutions (HPS.A), a leading manufacturer of dry-type transformers serving the North American market, experienced weakness in the first quarter. The situation was a headwind to the performance of both our growth and dividend mandates. The stock’s weakness was largely driven by concerns that the company’s position as an exporter to the United States would expose it to the Trump administration’s tariff regime.

Secondarily, sentiment was also negatively impacted by concerns that future demand could be affected by a slowdown in electrification trends, a slowdown in data centre spending related to the commercialization of artificial intelligence, and general economic weakness.

We believe that many of the concerns currently weighing on Hammond’s share price will prove to be overstated. Specifically, Hammond’s products are CUSMA-compliant and, therefore, not subject to the current tariff framework imposed by the Trump administration. Moreover, the majority of dry-type transformers are imported into the U.S. This suggests that even if tariffs are imposed, Hammond will not be at a competitive disadvantage due to a lack of domestic manufacturing capacity.

In addition, the raw materials used in the production of transformers are largely imported, which means that domestic producers would be subject to tariffs on these materials, effectively levelling the playing field between domestic and foreign producers.

Despite the recent decline in Hammond’s share price, Pembroke remains positive regarding the risk/reward profile of this investment at its current valuation. The company continues to benefit from a powerful convergence of secular trends, including electrification, the reshoring of manufacturing, and the burgeoning artificial intelligence industry.

Pembroke expects Hammond to capitalize on these strong demand tailwinds. The company should be able to use its leading position in the dry-type transformer market to deliver solid earnings per share growth, coupled with significant free cash flow generation.

 

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