U.S. Equity Strategies

Since the market bottomed last April, much has been written about the surge in the share prices of low-quality, unprofitable companies. Certainly, this factor has contributed to challenging relative results in recent months for Pembroke’s U.S. strategies. Nevertheless, the investment team aims to deliver results superior to its benchmark returns and is confident that calmer markets will return investor focus to quality and fundamentals.

The firm’s U.S. portfolios are exposed to a range of exciting themes, from artificial intelligence to homebuilding and logistics software. While there have been some short-term setbacks at the company level, Pembroke remains focused on the competitive advantages, long-term growth opportunities and balance sheet strength of each holding.

In some cases, the firm has built positions that have subsequently seen share price declines, for example when management teams announce plans to invest more in sales initiatives to drive future growth. If the financial return on such investments is clear, Pembroke will support them.

In general, the investment team aims to make the most of short-term share price fluctuations to generate long-term wealth for our clients. Ongoing growth at the holding level, reasonable valuations, and shareholder-focused executives give the team confidence that investor patience will be rewarded.

U.S. GROWTH STRATEGY

The Pembroke U.S. Growth Strategy performed essentially in line with the Russell 2000 index in the second quarter of 2025. After a challenging end to the first quarter and the difficult first few weeks of April, the strategy roared back from significant declines driven by Trump’s tariff threats to post an absolute gain.

In Canadian dollars, the strategy increased more modestly as the U.S. dollar has come under pressure for much of 2025. To date this year, the strategy has underperformed its benchmark modestly and has fallen in absolute terms, with this decline magnified in Canadian dollars.

Positive Contribution

Have you ever wondered where your local community buys specialized machinery such as small street cleaners and flowerbed watering contraptions? Who designs and manufactures these niche products? In many cases, the answer is Federal Signal Corp. (FSS). FSS is a company based in Illinois with a proven management team focused on maintaining and growing market-leading positions across a number of unique product lines.

FSS develops new machines internally while also using its substantial free cash flow to strategically acquire smaller competitors. The company’s reputation for product quality, coupled with its long-standing relationships with municipal buyers, is reflected in its financial results, which demonstrate consistent growth and high profit margins.

Notably, FSS manufactures its products in the U.S., shielding it from fears of a trade war and positioning it well given the Trump administration’s desire to encourage domestic production. Pembroke added to its position in Federal Signal in the second quarter, and the stock recently reached new highs.

Negative Contribution

Shares in Globus Medical (GMED) fell after the company’s growth in the first quarter of 2025 was slightly lower than investors had expected. However, the company maintained its guidance for 2025, citing a brief delay in the shipment of some products following the relocation of production to a new facility. Importantly, production lines were running as planned in April.

Furthermore, Globus sells expensive robots used in spinal surgery to hospitals around the world. Sales of these devices can be inconsistent, and the first quarter was slightly weaker than management had anticipated. Uncertainty, driven in part by Trump’s tariff threats and proposals to alter the U.S. healthcare landscape, led to delayed decision-making among some customers. During the first quarter earnings call, company executives noted that demand for their market-leading robots remains robust and that April had gotten off to a strong start.

GMED shares have also struggled in 2025 due to the acquisition of Nevro (NVRO), a troubled company operating in the pain management sector. GMED is accepting some near-term dilution of its profits in return for significant growth in 2026 and beyond. Management expects to significantly increase growth and profitability at Nevro, and has a proven track record of integrating acquisitions successfully. While the market did not welcome the short-term impact on GMED’s profits, Nevro is a small, low-risk acquisition with significant potential.

CONCENTRATED STRATEGY

In the second quarter of 2025, the Pembroke Concentrated Strategy performed essentially in line with the Russell 2000 index, rising in value. For the first half of the year, the strategy delivered challenging results on a relative and absolute basis. Overall, however, the results since the strategy’s inception in 2018 remain compelling, demonstrating the value of patience and a long-term focus.

The strategy is currently exposed to interesting themes. For instance, the investment team has initiated a position in Manhattan Associates (MANH), a software company with a strong market presence in warehouse management and omnichannel logistics. Although several large customers delayed implementations due to tariff-related uncertainty, causing management to provide a conservative revenue growth forecast for 2025, nothing about the company’s long-term revenue outlook has changed.

In fact, the opportunity to cross-sell newly launched products gives Pembroke increased confidence in the company’s multi-year prospects.

Positive Contribution

Shares in Pure Storage (PSTG), a company that sells innovative, cost-effective enterprise storage solutions, jumped in the second quarter of 2025 after it indicated that demand for its products remained strong. The growth in demand for data storage, driven in part by artificial intelligence and the need to store and access data quickly, is fuelling Pure Storage’s progress.

Furthermore, the company’s revenue is shifting quickly towards a more balanced mix of hardware and high-margin software offerings, which could lead to a revaluation of the business as this becomes more apparent to investors. Pure Storage has over $1.5 billion of cash on its balance sheet and is expected to generate close to $600 million of free cash flow in its current fiscal year. The shares are reasonably valued, and the company continues to expand its technological leadership.

Negative Contribution

Shares in Aaon (AAON), a company that sells cooling systems for use in commercial buildings, semiconductor manufacturing facilities and data centres, dropped after it indicated that a technological change in its commercial segment would lead to a slowdown in revenue growth for one quarter. Management compounded this disappointment by providing medium-term profit guidance without clearly explaining that its new manufacturing facilities would not be fully utilized until after 2029.

Although Pembroke’s team is disappointed with Aaon’s communications surrounding these two issues, the company’s fundamentals and outlook are highly attractive, as is its valuation. Given the explosive growth in artificial intelligence, data centre construction is expected to remain very strong for many years. For instance, OpenAI recently announced plans to rent an additional 4.5 gigawatts of data centre power from Oracle. To put this in context, one gigawatt can power 750,000 homes and is approximately the amount of energy produces by a nuclear reactor.

Aaon operates at market-leading profit margins and is poised to deliver many years of double-digit revenue growth. However, the near-term miss has resulted in shares trading at a multi-year valuation low. Pembroke has used this opportunity to increase its holding in Aaon significantly.