Active Investment: Looking Past the Obvious

January 2026

 

In periods of uncertainty, the words often attributed to Howard Marks ring true: you cannot do the same things as everyone else and expect a different result. It sounds straightforward. In practice, however, it is anything but.

In 2025, the Pembroke portfolios provided two contrasting experiences that put this idea to the test. One company’s share price rose sharply and was widely celebrated. Another declined steadily and came under increasing scrutiny. From the outside, the lesson appeared simple. From the inside, the decisions were far less obvious.

This article is not about explaining stock price movements. It is about how judgment is applied when outcomes are uncertain.

WHAT IT FELT LIKE TO LIVE THROUGH 2025

At the beginning of the year, Resideo Technologies (NYSE: REZI) was a stock many investors had learned to overlook. The company had a legacy environmental liability and operated two businesses that were often considered to be awkwardly combined. Early in 2025, concerns intensified. Tariff headlines and exposure to manufacturing in Mexico pushed the share price down sharply, with the stock falling by almost 40% by early April.

What followed surprised many observers. Over the next several months, the share price recovered strongly, almost tripling at its peak, before falling back late in the year following a modest reduction in guidance. Owning Resideo during this period was not a smooth experience. Investors had to sit through sharp reversals in sentiment.

Tecsys (TSX: TCS) followed a very different path. After trading high early in the period, the share price declined steadily throughout 2025, ultimately closing approximately one third below its highest point. There was no moment of relief or sudden re-rating. The experience was defined by persistence rather than drama.

From a distance, the contrast was striking. One stock appeared to validate confidence. The other tested it.

THE STORIES THE MARKET TOLD

In both cases, the market provided clear explanations.

Resideo’s recovery was largely due to risks that failed to materialize. Tariff concerns faded as compliance with the United States-Mexico-Canada Agreement (USMCA) became clearer. Management also announced their intention to separate the Products & Solutions business from ADI, a global wholesale distributor. As the situation became clearer and easier to understand, new investors entered the market and the valuation gap to peers narrowed.

Later in the year, a roughly five percent reduction in guidance led to a sharp sell-off of close to 25%. The explanation again seemed straightforward: a combination of disappointment and crowded positioning.

Tecsys was viewed differently. Software valuations compressed across the market amid growing concern about the potential disruption caused by artificial intelligence. At the same time, concerns related to hospital spending, political scrutiny of healthcare costs, and inconsistent bookings, reinforced the view that Tecsys was still in a prolonged transition phase. The narrative suggested that patience was required, but rarely rewarded.

Each explanation sounded reasonable. However, none of them were particularly helpful for long-term decision-making.

WHERE OUR WORK BEGAN

At Pembroke, our work rarely begins by asking why a stock has moved. Markets are good at explaining the past. Instead, we focus on a simpler yet more challenging question: has anything changed that affects our confidence in the business several years from now?

This has led us down two distinct, but related analytical paths.

RESIDEO: SEEING PAST THE NOISE

Our interest in Resideo was never driven by a single catalyst. Rather, it was driven by the business’s underlying durability.

Contrary to popular belief, Resideo is not a consumer electronics company. While it primarily provides indoor air temperature, quality and humidity control as well as security systems for the residential market, demand is driven by professional installers rather than discretionary consumer spending.

Around 80 percent of revenue is tied to repair and replacement activity. Products are usually installed behind walls and remain in place for many years. These characteristics reduce sensitivity to short-term consumer trends and price competition.

We also focused on management behaviour. Since 2020, management has been working through a deliberate process of simplification: rationalizing the portfolio, tightening costs and directing investment towards areas with clear returns. Progress has been incremental and operational rather than promotional.

Behind the scenes, we monitored practical indicators within its subsidiary ADI, such as inventory turnover and operational scale. These details helped us to assess whether execution was improving, even though the situation remained uncertain.

The most difficult moment came late in the year. A modest reduction in guidance triggered a sharp decline in the share price. At that point, the important question was not whether the news was negative, but whether the decline was structural or temporary. Our focus was on installer behaviour, channel relevance and business economics. We did not see evidence of lasting impairment.

Consequently, after having trimmed our position earlier when the valuation had tightened, we added back during the sell-off.

Resideo finished the year well above where it began. This outcome is secondary. What mattered was maintaining discipline throughout the volatility.

TECSYS: THE QUIET TEST OF PATIENCE

Tecsys presented a different challenge.

The company operates in the niche market of hospital supply chain software, where relationships are deeply entrenched and switching costs are high. As customers depend on these systems functioning reliably, change is slow and deliberate. Although sales are challenging, Tecsys’ high-quality offering result in a high win rate, as it mitigates the meaningful operational risk involved in replacing an incumbent.

The long-term opportunity remains intact. Hospital supply chains are widely recognized as being decades behind other industries. This creates a structural need for modernization that extends well beyond short-term budget cycles.

Tecsys is also in the midst of a transition towards a software-as-a-service (SaaS) model. Margin improvement is beginning to emerge, but, by design, it is gradual. Progress does not occur neatly quarter by quarter.

The addition of artificial intelligence has introduced another layer of uncertainty. While market commentary suggested disruption, our work indicated that, in environments where data integrity and sensitivity are critical, automation tools are more likely to enhance productivity than replace established systems.

We reduced our position earlier in the period when valuation moved ahead of fundamentals. As the share price declined, however, we chose to hold. The factors that would have altered our long-term view—sustained deterioration in bookings or a failure to deliver margin improvement—did not materialize.

Although Tecsys ended the period lower, the long-term potential for gain remains unchanged. Achieving this result and preserving this potential required patience rather than action.

WHAT THIS EXPERIENCE REINFORCED

These two examples can be viewed in terms of the outcome. One stock rose. One fell. From our perspective, both required the same level of discipline.

Active management is not about predicting short-term price movements or reacting to headlines. Instead, it involves making decisions when information is incomplete, separating signals from noise, and maintaining consistency when the path forward is challenging.

We believe that, over time, it is this emphasis on judgment—applied through both favourable and unfavourable periods—that allows us to manage capital thoughtfully and with intent.

 

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