October 2024
The third quarter proved rewarding on an absolute basis for Pembroke’s US equity strategies. Performance was driven by strong contributions from Industrials and Information Technology holdings. However, gains in the Financials, Real Estate and Utilities sectors made relative returns more difficult for managers who are more focused on traditional growth sectors, such as Pembroke.
The investment team seeks to invest in well-funded companies that are focused on translating revenue growth into long-term progress in earnings per share and cash flow. In 2024, the team has identified compelling new opportunities in sectors ranging from Retail to Industrials and Technology, highlighting a variety of ideas that offer interesting growth and valuation profiles.
US Growth Strategy
Pembroke’s US Growth Strategy gained in the third quarter, but trailed the Russell 2000 Total Return Index. For the year, the strategy is slightly behind its benchmark. The main contributors to performance over the past three months have been the Industrials, Consumer Discretionary and Information Technology sectors.
Positive Contribution
Security software provider Cellebrite (CLBT) was recently in the news for helping to crack the iPhone of the person who shot at former President Trump during a rally in Pennsylvania. The company’s cutting-edge products are used by law enforcement agencies around the world, helping to drive impressive growth and high levels of free cash flow. CLBT has over $300 million in cash and no debt, enabling it to continue investing in sales and research to maintain its market leadership.
Negative Contribution
Engineering firm Bowman Consulting Group (BWMN) saw its share price fall after it raised additional equity and then surprised investors with weaker-than-expected financial results. Despite this disappointment, BWMN is still growing at double-digit rates and acquiring competitors at attractive valuations. Pembroke has made a number of successful investments in the sector and believes that BWMN is executing a sensible long-term strategy. Management is well aligned with shareholders, but is new to the public markets. The Pembroke team has been advising management on how to better communicate with investors.
CONCENTRATED STRATEGY
Pembroke’s US Concentrated Strategy rose in the third quarter, but trailed the Russell 2000 benchmark. The strategy performed broadly in line with the Russell 2000 Index over the first nine months of the year.
Positive Contribution
In addition to the positive contribution detailed in the US Growth Strategy, the Concentrated Strategy benefited from the positive performance of SiteOne Landscape Supply (SITE), which continues to acquire smaller competitors in the landscape supply distribution market. SITE is building market-leading scale and is emerging as a best-of-breed operator and consolidator in a large and highly fragmented sector. Management has a strong track record of delivering organic revenue growth and, more importantly, SITE generates the free cash flow required to pursue its acquisition strategy, meaning it is not reliant on debt to achieve its long-term objectives. The company has the opportunity to grow to many times its current size without diluting shareholders, providing significant long-term upside.
Negative Contribution
Shares in Stevanato Group (STVN) fell after the company lowered its guidance for 2024. STVN supplies vials, auto-injectors and ready-to-use syringes to the global pharmaceutical industry. The company’s customers overbought vials during the pandemic to avoid shortages, and have been working through this excess inventory over the past year. Investors have been frustrated by the lack of visibility on when demand will pick up, but Pembroke sees this blip as an opportunity to build its position. STVN remains competitively well positioned and will benefit from the long-term shift towards more complex biologics requiring single-dose delivery mechanisms, and from increasingly stringent regulatory requirements. The investment team has been adding cautiously ahead of a rebound in revenue growth.
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.
