Pembroke’s US portfolios posted favourable absolute and relative gains in the second quarter of 2021. Compared to the Russell 2000 benchmark, the most significant contributions came from the healthcare, information technology and industrial sectors.
Whereas highly cyclical industries such as energy and basic materials performed well during the first three months of this year, the second quarter was characterized by more balanced performance across sectors. Pembroke’s security selection stood out in this environment. In the case of several holdings that were challenged by COVID, but still had compelling long-term opportunities, the investment team’s patience was rewarded.
The US portfolio’s key underlying metrics, such as growth, balance sheet strength and returns on capital, remain healthy and are emblematic of a “Pembroke portfolio”. The investment team is maintaining valuation discipline by trimming or even selling positions up against their long-term potential. Fortunately, the new-idea funnel remains strong, forcing the team to constantly compare what we own to other investment opportunities.
Two stocks that made positive contributions to returns in the second quarter
Perficient’s (“PRFT”) share price surged in the first half of 2021, as customer demand for its services returned after a more challenging 2020. Year-over-year revenue growth in the first quarter was solid, and the company called for ongoing strength through the remainder of 2021. As a technology consulting firm with expertise in digital services, Perficient is well positioned to capitalize on its customers’ growing need to invest in their front-end and back-end digital infrastructure. Pembroke was able to look through the pandemic and focus on Perficient’s long-term growth trajectory given the company’s marked profitability and strong balance sheet. In fact, the COVID pandemic pushed more business online and more work into a virtual setting, stressing companies’ ability to meet customer demands in this new environment. While the worst of the pandemic may be over in the US, the need for many businesses to catch up from a technological perspective is not. Perficient is also marching its profit margins higher by moving work offshore to lower-cost countries and is continuing to execute its consolidation strategy, recently acquiring a company in Colombia that provides software development services.
Shares in Globus Medical (“GMED”) jumped on the back of the company’s impressive first-quarter results and after the company significantly raised revenue guidance for 2021. Globus provides components and technology used in spine surgery. During the worst of COVID, elective surgeries declined and hurt Globus’ growth. Pembroke looked past this short-term challenge given the company’s impressive profit margin profile, strong balance sheet and unimpaired long-term growth opportunity. In recent years, the company’s effective sales force, combined with its leading robotic offering, has allowed Globus to win share from large incumbents, such as Medtronic and Johnson & Johnson. In the first quarter of 2021, Globus reported a 22% surge in year-over-year sales in its US business, impressive given the overall market’s growth of mid-single digits. Customer interest in the company’s robot remains strong, and the opening of the US economy post-COVID is leading hospitals to make significant capital purchase decisions. Led by its founder-CEO, Globus continues to invest in the trauma segment as well, which represents an important new leg to its growth stool. Over the long-term, the company is also positioning itself to enter new areas, such as knee and hip surgery. Despite these investments, Globus continues to operate at strong EBITDA margins and has net cash on its balance sheet. The company ended the second quarter of 2021 as the largest holding in Pembroke’s US portfolios.
Two stocks that made negative contributions to returns in the second quarter
Shares in holding Brightcove (“BCOV”) declined in response to news that the video management software company experienced unexpected customer losses in its media division. While this development was disappointing, it was not large enough to force a change in the company’s 2021 financial guidance. Managing video content for media companies and enterprises remains a significant growth opportunity, captured in Brightcove’s significant backlog growth and record bookings in the first quarter. Further, management continues to meet its profit margin expansion objectives.
Shares in Danimer Scientific (“DNMR”) declined, and Pembroke ultimately exited the DNMR position in order to re-allocate capital to more favourable risk-reward positions. While Danimer is attacking the exciting objective of reducing the use of non-biodegradable plastics, the investment team grew concerned with the high capital requirements and significant operating risks over the coming years.
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Disclaimer
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.
