April 2025
Trade and tariff uncertainty captivated investors in March. At the time of this writing in April, market volatility reached a crescendo as the world reacted to President Trump’s “Liberation Day” announcement of tariffs on most U.S. trading partners. Since then, the market has bounced up and down on a daily basis, reacting to the news flow on tariffs, inflation and other macroeconomic data.Pembroke’s focus on diversified portfolios, balance sheet strength, profitability and strong returns on capital, paid off on a relative basis. Over the last quarter, information technology and industrial holdings were the biggest detractors, with no sector adding value in the first three months of the year.
Valuations are currently attractive, and the Pembroke team is deploying capital to its highest conviction positions on a prudent timeline. The fear now is that a recession would hurt both revenue and earnings. However, the markets have already priced in a significant amount of negative news. The opportunities for investors willing to look beyond the short-term noise and fear are very compelling.
U.S. GROWTH STRATEGY
The Pembroke U.S. Growth Strategy slightly underperformed its Russell 2000 benchmark in the first quarter of 2025, but the absolute results for both were disappointing after a strong finish to 2024. While markets have traded lower, Pembroke’s strategy has outperformed its benchmarks from the end of March through April 11.
Positive Contribution
Shares of Ollie’s Bargain Holdings (OLLI) rose in the first quarter of 2025, as investors reacted to strong financial results and news that the company would acquire some attractive locations from a struggling competitor.
Ollie’s is an extreme-value retailer that operates warehouse-style store formats focused on brand-name closeout merchandise (70% of sales) and private label products (30%) at deeply discounted prices (up to 70% below department stores and mass-market retailer prices). The low prices and brand-name merchandise attract shoppers facing inflation and economic uncertainty.
Ollie’s has the opportunity to triple its store base over time and has become the preferred buyer for many major sellers of merchandise ranging from branded candy to televisions.
Negative Contribution
Vertex (VERX) provides tax compliance software to large corporations. The company’s products save its clients money and help them avoid regulatory and financial penalties. Vertex made an acquisition in 2024 that required some upfront investment, causing management to slightly lower its 2025 profit margin guidance.
Shares fell in response, although management is confident that the acquisition will help accelerate revenue growth from around 15% to over 20%, and drive significant free cash flow growth over the next three to five years. Pembroke is optimistic about the multi-year upside in the shares, and VERX remains a top ten position in U.S. strategies.
CONCENTRATED STRATEGY
The Pembroke Concentrated Strategy lagged its Russell 2000 benchmark slightly during the first three months of 2025. However, both delivered underwhelming absolute returns following a strong end to last year. Since the end of March, despite market declines, the strategy has outpaced its benchmarks through April 11.
Positive Contribution
Shares in Watsco (WSO) rose around 8% in the last quarter. Investors cheered both strong results for the period and looked forward to what should be a strong year for the leading distributor of heating, ventilation and air conditioning equipment in North America.
Watsco is benefiting from the largely non-discretionary nature of its product—if your heating, air conditioning or refrigeration system breaks down, you fix it fast—and from a transition in refrigerant standards. These standard changes, which occur every few years, tend to accelerate topline growth and margin expansion through higher selling prices.
Although it trades at a premium valuation, Watsco is one of the highest quality and most durable growth stocks in our U.S. portfolios.
Negative Contribution
As for the U.S. Growth Strategy, Vertex (VERX) was the main detractor from the Pembroke Concentrated Strategy. See the previous section for more information.
Other Articles Of Interest
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.
