US Equity Strategies

US Growth Equity Strategy – Q4 Portfolio Commentary

Pembroke’s US equity growth portfolios closed out 2020 with a surge higher in the final three months of the year. While our strategy’s fourth-quarter performance modestly trailed that of the Russell 2000, the absolute increase was significant, and the portfolios remained well ahead of their benchmark for the year. News of Pfizer’s effective vaccine in November boosted companies in cyclical sectors like financials and energy, more than secular growth companies that had already been advancing for much of the year. While cyclical businesses and companies most affected by the pandemic (e.g., travel and movie theaters) will benefit most from a “return to normal”, many of these companies face long-term challenges to their growth. Some of the portfolio’s holdings operate in sectors that will benefit from an economic upturn while also enjoying long-term secular growth drivers. Overall, Pembroke’s US equity portfolios are made up of companies that we believe will grow, specifically on a per share basis, over the next several years despite the incredible disruption caused by COVID-19. Their products and services, differentiated strategies, and strong balance sheets should allow them to take advantage of expanding end markets and to win market share over time. While progress is rarely linear, their growth dynamics put them in a strong position to create long-term shareholder value even in an uncertain and ever-changing world.

Two stocks that made positive contributions during the quarter included:

Shares in Enphase Energy Inc (“ENPH”), a manufacturer of solar solutions for the residential and commercial markets, moved higher over the course of the fourth quarter. The company benefitted from strong worldwide demand for its industry-leading microinverters and a favorable change in narrative driven by the incoming Biden administration. Profit margins also expanded and may continue their upward trajectory due to pending product launches and the declining prices of key components. Buoyed by an experienced management team and an expanding addressable market, we believe ENPH is well-positioned to deliver growth and gain market share in the coming years.

Shares in Stoneridge (“SRI”) jumped 65% in the fourth quarter of 2020. Stoneridge’s outsized return in the quarter was due to a combination of better-than-expected earnings results and 2021 guidance, and strong investor sentiment driving cyclical stocks exposed to an economic recovery. The company is a leading provider of electrical components that make cars and trucks safer, greener, and more connected. Stoneridge should benefit from the secular shift toward these components, and from increased post-pandemic consumer spending.

Two stocks that made negative contributions during the quarter included:

Despite reporting strong quarterly results, close-out retailer Ollie’s Bargain Outlet Holdings (“OLLI”) stock failed to keep up with the overall market in the fourth quarter.  Ollie’s continues to face investor skepticism about lapping tough comparable results in 2021 after posting outsized sales and earnings during 2020. As a close-out retailer, the current consumer environment is presenting Ollie’s with exciting inventory purchasing opportunities, paving the way for strong results going forward. Specifically, the company is taking advantage of the struggles of consumer goods companies and other retailers to buy inventories for pennies on the dollar. Armed with a strong balance sheet made of up $325 million in cash and no debt, Ollie’s is in the best financial position in its history to purchase in-demand inventory at attractive prices. Further, management expects good real estate to become available in the months and years ahead to open new stores.

The shares of Encore Capital Group (“ECPG”), which acquires unpaid debt and organizes repayment programs for customers, declined after the company reported strong quarterly results. Increased regulation under a Democratic administration in the US may be possible as prior governments have imposed strict penalties on effective and rule-abiding companies operating in this sector. Further, the prospect of an improving economy has led to concerns that there will be less charged-off credit to buy, which will boost prices and lower returns for Encore and its competitors. The holding was sold from the portfolio to make room for higher conviction positions.

CONCENTRATED GROWTH EQUITY STRATEGY – Q4 PORTFOLIO COMMENTARY

The Pembroke Concentrated Fund (“PCF”) gained 21.4% during the quarter, underperforming its benchmark the Russell 2000 Index which gained by 25.4% during the quarter. Since its inception on January 31, 2018, the fund has produced compounded annual gains of 22.8% compared to the Russell 2000 Benchmark at 10.9%, for an annualized excess return of 11.9%.  The Concentrated Fund’s strategy incorporates strict discipline and focuses on high-quality growth companies.

The main source of underperformance during the quarter was the market’s dramatic pivot to lower quality, value-oriented sectors and companies, which had unperformed for much of the year.  Specifically, energy, materials, and financials stocks, and stocks with lower margins and more levered balance sheets broadly outperformed the market and PCF.  While the market will periodically shift its attention to these characteristics, we maintain our approach of investing in high-quality growth companies over the long-term.  At quarter-end, the portfolio consisted of 20 stocks, with approximately 92% of the fund invested in the US and 8% in Canada.

Two stocks that made positive contributions during the quarter included:

Shares in Stoneridge (“SRI”) jumped 65% in the fourth quarter of 2020. Stoneridge’s outsized return in the quarter was due to a combination of better-than-expected earnings results and 2021 guidance, and strong investor sentiment driving cyclical stocks exposed to an economic recovery. The company is a leading provider of electrical components that make cars and trucks safer, greener, and more connected. Stoneridge should benefit from the secular shift toward these components, and from increased post-pandemic consumer spending.

Gentherm (“THRM”), which sells technology to heat and cool car seats, saw its stock price surge in the fourth quarter of 2020 after the company reported better-than-expected revenue and a three-year high in gross margins. Management also pointed to a robust request-for-quote pipeline from large OEMs and announced an important win for its heated/cooled seat technology with BMW. Automotive production fell off in 2020 due to COVOD-19, failing to meet consumer demand; in the coming year, Gentherm should benefit as its customers ramp up their volumes. Looking out beyond 2021, Gentherm is well-positioned to win business for its new Climate Sense product, which will help control the climate inside cars in an energy-efficient, personalized manner. The company will benefit over the next five years from the growing number of hybrid and electric vehicles, which will need to find climate solutions that use less energy than traditional automotive HVAC systems.

Two stocks that made negative contributions during the quarter included:

Shares in supply chain management software company Kinaxis (“KXS”) gave back some of their 2020 gains in the fourth quarter of the year. As COVID-19 raged, Kinaxis was a short and long-term beneficiary of the pandemic due to the manufacturing disruptions the illness caused around the world. More than ever, companies need real-time visibility into their supply chain opportunities and vulnerabilities. The company’s impressive growth, high margins, and positive commentary about the pipeline of new deals supported investor enthusiasm. With news of an effective vaccine in November, however, investors rotated capital into more economically sensitive industries, reducing the short-term interest in Kinaxis’ stock. At the same time, Kinaxis’ fourth quarter guidance was muted by small COVID-19-related customer losses and delayed purchasing decisions by large prospects. Nevertheless, the pipeline of new deals remains encouraging and the company’s backlog grew 26% year-over-year. Trade wars, the ongoing pandemic, and other risks are all driving companies with global supply chains to invest in technologies that enhance their ability to react to unexpected changes, which should continue to drive interest in Kinaxis’ unique product suite.

Shares in Installed Building Products (“IBP”) declined 4% in the fourth quarter of 2020. Despite posting stronger than expected Q3 earnings results, IBP came under pressure due to market-level macro factors.  Specifically, as interest rates rose following the vaccine announcements and the Biden presidential victory, fund flows shifted away from interest-rate-sensitive home builders and related services to more cyclical sectors.  We view these sector flows as short-term in nature.

 

 

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• See Our Solutions page for Pembroke’s range of funds.
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