January 2025
While markets rallied following Trump’s election victory, the euphoria was short-lived as investors grappled with the pace of central bank rate cuts in 2025. However, the pullback from equity market highs creates a positive backdrop as valuations in Pembroke’s US portfolios are compelling. In addition, company-level earnings and profit growth are expected to be impressive.
Pembroke invests in well-funded companies focused on translating revenue growth into long-term progress in earnings per share and cash flow. In 2024, the investment team has identified new opportunities in sectors ranging from Retail to Industrials and Information Technology. These opportunities reflect a diverse range of companies with the potential to create significant shareholder wealth over the coming years.
US GROWTH STRATEGY
Pembroke’s US growth strategy outperformed the Russell 2000 Total Return Index in the fourth quarter. For the year, the strategy was broadly in line with its benchmark. Growth, innovation and balance sheet strength supported the performance of Information Technology holdings. On the other hand, positions related to the Automotive and Housing sectors struggled as a result of low volumes and slower than expected interest rate cuts forecast for 2025.
Pembroke remains focused on the multi-year opportunity created by the US housing shortage and believes the pullback in share prices creates an attractive set-up for long-term investors.
Positive Contribution
Tax software provider Vertex (VERX) saw its shares rise following strong growth and profitability metrics over the course of 2024. The company’s expertise helps customers comply with a complex and ever-changing state and municipal sales tax landscape.
With its products delivering efficiencies, cost savings and reduced regulatory risk, Pembroke expects adoption by new and existing customers to continue at a solid pace for the foreseeable future.
Negative Contribution
Long-term winner Monolithic Power (MPWR) saw its shares fall on concerns that it is no longer the sole supplier of power management for Nvidia’s products. However, MPWR remains a key supplier to other artificial intelligence semiconductor manufacturers. In addition, the company’s automotive and industrial business continues to grow rapidly.
While the news regarding Nvidia has been somewhat disappointing, Pembroke has always expected other suppliers to gain market share. The investment thesis around MPWR as a diversified, growing, differentiated and highly profitable manufacturer remains intact. Pembroke took advantage of the fall in the company’s share price to add to the position.
CONCENTRATED STRATEGY
Pembroke’s US concentrated strategy rose slightly in the last quarter, in line with the performance of the Russell 2000 Total Return benchmark. The strategy also performed broadly in line with the Russell 2000 Index over the course of the year.
Positive Contributions
In addition to the ongoing contribution from tax compliance software provider Vertex (VERX), new position Q2 Holdings (QTWO) saw its share price rise in the last three months of 2024.
QTWO provides front-end banking products to small and medium-sized banks and credit unions in the US, helping them offer online banking services that are equal to or better than those of their largest competitors. The short-lived regional banking crisis in March 2023 prompted QTWO’s customers to invest aggressively in technology to improve their growth and the retention of customer deposits.
QTWO’s management has taken advantage of this trend to grow its recurring revenue base and increase margins. Pembroke expects this investment cycle to continue for several years, which should also benefit nCino (NCNO), another back office lending software provider and a new position in the portfolio.
Negative Contribution
Shares in Installed Building Products (IBP) struggled in the last three months. IBP installs insulation and other “nuisance” products in homes. The lack of new construction and the Federal Reserve’s disappointing guidance on interest rate cuts in 2025 have led to investor concerns about the near-term outlook for housing-related stocks.
However, the housing shortage in the US is significant and will take many years to resolve, creating a tailwind for investors with a multi-year outlook. In addition, IBP continues to use its robust free cash flow to buy smaller competitors at attractive prices, setting it up for rapid growth when the sector conditions improve.
Pembroke has experienced share price volatility with IBP in the past and sees the current decline as another buying opportunity. The company’s operations, shareholder-focused capital management strategy, and expansion into adjacent verticals such as garage door installation, provide ample reason to be excited about the coming years.
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.
