Canadian Equity Strategies

July 2025

 

The year got off to a challenging start, with trade tensions causing significant uncertainty and freezing corporate decision-making, as well as leading to a contraction in valuations. However, Canadian markets rebounded sharply as investors welcomed the de-escalation of tensions, and Pembroke’s Canadian equity strategies experienced strong returns in the second quarter.

Although companies have experienced a wide range of initial effects—from demand destruction in tariff-sensitive sectors to a temporary pull forward of sales—the ultimate impact on global trade remains to be seen. President Trump’s recent announcement that a 35% tariff will be applied to virtually all Canadian imports from August 1st serves as a timely reminder that the policy landscape can change quickly and significantly.

The scope of the measure, the possibility of exemptions and Ottawa’s potential response are all still under negotiation, resulting in a wide range of possible outcomes. While equity markets continue to treat the most extreme scenarios as low-probability events, we expect risk premiums to ebb and flow as further details emerge in the coming weeks.

CANADIAN GROWTH STRATEGY

Our growth-oriented Canadian strategy bounced back strongly after the sell-off in the first quarter. Many of our major holdings, which had been affected by concerns about potential tariff impacts, recovered quickly as investors realized that these concerns were either exaggerated or unfounded.

While trade and macroeconomic uncertainty have led to significant volatility so far this year, the fundamental progress of our portfolio investments has been encouraging and, in our view, has not received sufficient recognition from the broader markets.

DIVIDEND GROWTH STRATEGY

Pembroke’s dividend growth strategy also rebounded significantly after posting losses in the first quarter. Following a tariff-challenged start to the year, the portfolio enjoyed a broadly based rally and particularly strong returns from several large holdings.

Even though the strategy has experienced some volatility in its year-to-date results, the companies in the portfolio remain conservatively financed, offer well-funded dividends and attractive valuations, and have skilled and aligned management teams. We believe the strategy is in a good position to deliver total returns through a combination of dividend yield, per-share cash flow growth and multiple expansion.

CANADIAN ALL CAP STRATEGY

Pembroke’s all cap strategy enjoyed a successful second quarter, building on the modest gains made in the previous period. The volatile markets enabled the redeployment of capital from cash reserves and precious metals producers, which had performed well in the first quarter, into positions in cyclical and growth-oriented businesses, where significant weakness was observed during the period.

In addition to the value added through these tactical shifts, the portfolio saw encouraging fundamental performance from numerous holdings. The strategy’s focus on entrepreneurial growth and its more targeted portfolio structure set it apart from broader Canadian indices.

POSITIVE CONTRIBUTION TO THE STRATEGIES

From a company-specific perspective, shares in 5N Plus (VNP), a producer of specialty semiconductors and performance materials for the solar, space and healthcare industries, performed well, despite an initial sell-off at the start of the year.

As a Canadian exporter to the United States and a key supplier to the American domestic solar industry, investors were concerned that 5N Plus would face headwinds from the Trump administration’s trade policies and its lack of support for the clean energy industry. However, in reality, punitive tariffs levied on China have strengthened 5N Plus’s competitive position in the United States.

Furthermore, utility-scale solar continues to improve its cost competitiveness relative to other forms of power generation, regardless of incentive programmes in place. While the fears surrounding 5N Plus in the first quarter were understandable, they were ultimately overstated.

From a longer-term perspective, we remain optimistic about 5N Plus’s prospects, irrespective of the noise on the political and trade fronts in the near term. The company sits at the intersection of several long-term trends, including energy scarcity and energy independence, the onshore/nearshore relocation of manufacturing, and the commercialization/militarization of space.

We believe that the company’s hard-won expertise in materials science serves as a deep and durable moat, positioning it well to compound shareholder capital at attractive rates.

NEGATIVE CONTRIBUTION TO THE STRATEGIES

On a negative note, shares in VerticalScope (FORA) fell in the second quarter following the company’s business update, which emphasized operational challenges and a downgraded the financial outlook for 2025. FORA operates a cloud-based digital platform for online enthusiast communities in categories where consumers tend to spend larger amounts of money. The company cited changes to Google’s core search algorithm as having had a negative impact on its traffic trends and video advertising revenues.

FORA has successfully navigated such transitions before, ultimately restoring revenue and productivity. However, near-term results will be affected as the company works through these changes. Nevertheless, VerticalScope remains well financed and profitable, generating free cash flow that will be reinvested to drive both organic and acquisitive growth.

 

Other Articles Of Interest