John Zechner's Top Picks
John Zechner, chairman and founder of J. Zechner Associates
Focus: North American large cap stocks
Even though stocks maintain their overall upward momentum in the short term, we continue to manage overall portfolio risk by taking profits in the more volatile sectors, including high multiple/high growth stocks, while adding to positions in the resource sector and financials. Our overall stock market weight remains close to the long-term average of 50 per cent. We have focused on higher yield stocks in the telecom, banking and pipeline sectors as well as an 8-10 per cent position in preferred shares, which benefit from a stronger corporate outlook and firming interest rates. Going forward, the second year of any recovery tends to face more ‘roadblocks’ along the way. Assuming the sharp, fast economic recession and bear market last year set the stage for a new economic and stock market cycle, then we can expect a more challenging year for stocks in 2021, similar to recoveries in 1982-84, 1990-92, 2001-03 and 2009-11.
The first year of bull markets associated with economic recovery tend to show large gains with only minor corrections as investors are generally underweight stocks or out of the market altogether. As the belief in a recovery takes hold, they tend to be buyers on any dip, thereby keeping the uptrend intact. Larger corrections are usually seen in the second year of new bull markets, when there are fewer underweight investors looking to increase their exposure. We believe 2021 could be shaping up similarly. While we think that stocks will be higher a year from now, we expect more ‘bumps along the way’ than we have seen in the last twelve months. The zero-rate policies of the past ten years has probably milked the rising multiples trade as much as it can. We believe some sectors will generate enough profit growth to show net stock price gains even as earnings multiples contract due to higher interest rates.
Arc Resources (ARX TSX) - Most recent purchase: $7.40, April 2021
Arc Resources has become the newest name among senior producers after buying Seven Generations Energy, consolidating assets in the natural gas-rich Montney region of British Columbia and Alberta. The combined company becomes Canada’s largest condensate producer and third-largest natural gas producer. Positives from the deal include cost savings, capital allocation opportunities and larger company size being advantageous when dealing with marketing partners and accessing capital markets. Arc should be able to use cash flow to reduce debt levels to 1.0-1.5 times net debt to annualized FFO; then, Arc looks to invest in the highly prospective Attachie area to drive the next increment of return to shareholders.
Rogers Communications (RCI/B TSX) - Most recent purchase: $59.00, April 2021
The telecom sector remains one of our highest conviction bets over the long term. In a market where investors are looking for ‘long duration assets’, companies in this sector have built out massive networks to meet data demand, increased streaming, and the shift to 5G. This makes for a great ‘infrastructure play’ at a substantial discount. Telecoms have lagged other growth stocks due to reduced roaming fees tied to travel and the elimination of ‘overage fees’ for internet services, but those annual declines will now fade away. Rogers pays an attractive dividend (with growth potential) and generates substantial free cash flow. We are using an 80 per cent probability that the announced intention to buy Shaw Communications at $40.50 will go through with some associated sales of wireless assets in central Canada. The acquisition will be accretive to growth and add further scale to operating results, improving operating margins.
Martinrea International (MRE TSX) - Most recent purchase: $12.80, April 2021
This stock has multiple attractions: an exceptionally low valuation but some earnings cyclicality that will allow it to outperform strongly as the global economic recovery continues. The company got through the lockdown last year with minimal disruption, has a strong balance sheet and generates positive free cash flow. It focuses on ‘lightweighting’ of vehicles through greater use of aluminum parts. The auto parts companies are also able to shift production to supply growing demand for electric vehicles without the associated valuation risks. The heavily discounted valuation provides an opportunity much like it did at market lows in 2009 and 2016. Insiders at the company have also been active buyers of the stock, another endorsement of the attractive valuation and growth opportunity.
PAST PICKS: July 13, 2020
Shaw Communications (SJR/B TSX)
- Then: $23.80
- Now: $34.96
- Return: 47%
- Total Return: 53%
Keyera Corp (KEY TSX)
- Then: $20.25
- Now: $26.51
- Return: 31%
- Total Return: 39%
iShares Silver Trust (SLV NYSE)
- Then: $17.73
- Now: $23.98
- Return: 35%
- Total Return: 35%
Total Return Average: 42%
Personal Twitter Handle: @jzechner56
Company Website: www.jzechner.com