US Equity Strategies


October 2023


Despite many investors’ current concerns about an economic downturn, most company-level fundamentals remained robust in the third quarter, although vulnerabilities have become apparent in specific subsectors, including technology consulting and biotechnology. Concretely, the third quarter saw positive returns only in the energy and financials sectors of the Russell 2000. These are not typically within Pembroke’s core focus, which emphasizes high-quality, well-financed businesses with a competitive edge.

Market volatility is now offering favourable opportunities to invest in existing holdings and reconsider growth companies that were trading at excessive valuations by the end of 2021. Pembroke is strategically reallocating cash to well-financed companies, anticipating them to emerge from this economic uncertainty as larger, more profitable market leaders.

US Growth Strategy

Pembroke’s US growth equity strategy experienced a decline in the third quarter of 2023, although it remained largely in line with the Russell 2000, which saw a modest increase over the first nine months of the year. Rising interest rates and falling valuations over the past three months have impacted Pembroke’s holdings, particularly in the industrial, healthcare, and information technology sectors.

Two stocks that made positive contributions to returns of the strategy during the past quarter

Qualys (“QLYS”) specializes in cyber security software, offering vulnerability management (VM) solutions to enterprises worldwide. The company serves tens of thousands of customers across more than 130 countries. Vulnerability management tools detect security vulnerabilities in an organization’s software and hardware. These could range across tens of thousands of touchpoints. Such vulnerabilities signify weaknesses in an organization’s technological infrastructure, creating potential avenues for exploitation by malicious entities. Despite the broader cutback in technology expenditures in 2023, businesses remain committed to security investments. This dedication is evident from QLYS’ impressive year-over-year sales growth of over 14% in the most recent quarter. Even though this growth may taper to around 10 to 12% in the forthcoming year due to anticipated curbs on technology outlays, shareholders can expect steady revenue increases along with robust operating profit margins that exceed 40%.

Construction Partners (“ROAD”) is a leading infrastructure company specializing in road paving services in the southeastern US. With a vertically integrated model, the company primarily engages in smaller, local projects, reducing the risk of cost overruns. Despite facing challenges in 2022 such as supply chain disruptions, labour shortages, and escalating commodity prices, ROAD’s resilient performance reassured investors that these issues were not indicative of long-term structural problems. The demand for ROAD’s services remains strong, bolstered by generous state-level Department of Transportation budgets and further augmented by the Federal Infrastructure Investment and Jobs Act. This act, which is just beginning to influence the company’s bookings, promises to support ROAD’s growth in the coming years. Moreover, as the company continues to scale, its renegotiated contracts account for rising commodity prices, highlighting management’s commitment to sustaining an upward profit margin trajectory.

Two stocks that made negative contributions to returns of the strategy during the past quarter

Shares of Perficient (“PRFT”) experienced a decline, reflecting the broader slowdown in technology spending that impacted the company’s project pipeline. Many of its clients had expedited their technology investments during the COVID pandemic and are currently evaluating subsequent moves. As a result, management revised their revenue and earnings guidance for 2023 downwards. However, the long-term prospects for PRFT appear promising. There is an expectation that its clients will eventually increase their spending on information technology infrastructure, particularly emphasizing the adoption of contemporary cloud-based software and the development of intuitive consumer applications. Furthermore, Pembroke anticipates that Perficient will capitalize on the burgeoning trend of artificial intelligence across the corporate sector. With a strategic and cautious perspective on growth in this challenging market, management has conveyed intentions to enhance profit margins and pursue acquisitions when opportunities arise. The present stock valuation offers a significant opportunity for investors who are optimistic about a resurgence in corporate technology investments in the upcoming years.

Globus Medical (“GMED”) shares experienced a downturn in the third quarter of 2023, ensuing a challenging first half which included the announcement of its acquisition of Nuvasive, a major competitor. This acquisition was finalized in September. Globus, known for its spine surgery products, has now ascended to the position of the second-largest entity in its domain. This merged entity boasts a position of zero net debt, with the promise of robust free cash flow. Management has set its sights on elevating Nuvasive’s operating profit margins by over 10% and envisions utilizing Nuvasive’s sales team to promote Globus’s cutting-edge minimally invasive robot. While there are apprehensions among short-term investors about the potential complexities of integrating the sales forces of the two firms, Globus had already factored in these challenges during the acquisition negotiation phase. If the amalgamation process surpasses expectations, the prospects for enhancing shareholder value could surpass management’s initial projections, and early signs are promising. Despite consistently delivering strong results, Globus’s trading value currently sits notably below its historical average. Moreover, the company’s board recently revealed plans to repurchase approximately 5% of its outstanding shares. Given the substantial potential for share price appreciation, Pembroke has augmented its stake in GMED.

Concentrated Strategy

The last quarter marked the fourth consecutive quarter where the strategy has achieved growth both on an absolute basis, and on a relative basis compared to its benchmark, the Russell 2000 Index (“R2000”). The strong performance this quarter stemmed from our investments in US residential construction and technology sectors. However, this was marginally offset by challenges in some of our business services and communication services positions.

Two stocks that made positive contributions to returns of the strategy during the past quarter

Shares of Sprout Social, Inc. (“SPT”) rose by over 8% in the third quarter of 2023, in contrast to the Russell 2000 benchmark, which declined by more than 5%. SPT reported robust revenue and free cash flow for the quarter, significantly surpassing consensus forecasts. Beyond the financial metrics, SPT has sustained its rapid growth trajectory and solidified its leading position in the highly consolidated social media management software market. The company recently acquired Tagger, the premier provider of influencer marketing software. We view Sprout as a distinct leader in a vast, yet under-penetrated market, characterized by swiftly growing margins and steered by an aligned management team.

Shares of Stoneridge, Inc. (“SRI”) appreciated by over 6% in the third quarter of 2023, while the Russell 2000 benchmark declined by more than 5%. RI has demonstrated strong performance as automotive production and demand have rebounded from the lows experienced during the pandemic. The company’s growth rate has surpassed the market, it has been successful in widening its margins, and it has preserved its competitive stance and relevance to major industry trends, reinforcing our original investment premise. We maintain our confidence in the potential and anticipate several years of consistent growth in the future.

Two stocks that made negative contributions to returns of the strategy during the past quarter

Shares of Paycom, Inc. (“PAYC”) fell nearly 19% in the third quarter of 2023, while the Russell 2000 benchmark saw a decline of more than 5%. PAYC’s projected revenue growth for the latter half of 2023 did not sit well with the market. The company projected its growth rate to be in the low 20%, a step down from the 30% expansion observed in 2022. Additionally, the market perceives PAYC, in its role as a payroll processor, to be vulnerable if a recession materializes and unemployment rises. While we refrain from making short-term economic or market predictions, we recognize in PAYC a company that boasts revenue and earnings growth exceeding 20%, coupled with impressive margins, returns, and free cash flow. Additionally, PAYC has a robust balance sheet, a dedicated management team, and a valuation that appears quite reasonable. We remain confident in the business’s quality and see tremendous potential in the stock for the long haul.

Bio-Techne (“TECH”) stands as a premier supplier of consumables and analytical instruments pivotal for life science research and advanced drug production. The pandemic acted as a catalyst for growth in research, as biotech firms amassed unprecedented capital. Concurrently, vaccine manufacturing resulted in remarkable profits for pharmaceutical entities and their corresponding suppliers. This period also saw an unparalleled surge in merger and acquisition activities, inducing substantial valuation growth for the sector. However, fast-forwarding two years reveals an industry contending with challenges, which drove valuations to historically low levels, creating an opportunity for patient investors. Elevated interest rates have curtailed the allure of long-duration assets, causing biotech funding to revert to levels observed between 2018 and 2019. Consequently, less financially secure biotech entities have adopted stringent cash conservation strategies. Another challenge emerged from supply chain disturbances, prompting customers to overstock inventories, which they have been depleting throughout the year, affecting their suppliers. Nonetheless, Pembroke remains optimistic, perceiving these challenges as fleeting, and believes in Bio-Techne management’s recalibrated long-term growth and profitability projections, as unveiled during their recent analyst day. With an available arsenal of $5 billion for merger and acquisition pursuits, and given the industry’s subdued valuations, Bio-Techne is strategically poised to make counter-cyclical acquisitions of distinctive and rapidly expanding assets. Pembroke posits that as a critical equipment provider in the biotech arena, Bio-Techne offers an enticing avenue for investors to be exposed to this perpetually growing industry, while circumventing the inherent uncertainties tied to drug development.


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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.