John Zechner, chairman and founder, J. Zechner Associates

FOCUS: North American large cap stocks


No shortage of worries for investors right now with stocks still trading near record valuations, particularly in the high-growth sectors, at the same time that central banks are removing the stimulus of ‘free money’ that has fueled the bull market in financial assets over the past decade. Moreover, inflation is running at 40-year highs and investors fear that the central bank actions to control runaway prices could force the global economy into a recession. On top of all that, the war in Ukraine is worsening a global shortage of raw materials and continued strains in the supply chains that have been developed over the past three decades.

However, we don’t think investors should be panicking and selling off all of their stock holdings. While risks remain, investors have been positioning for some weakness with cash levels in institutional accounts above average levels and investor sentiment among private investors reflecting extreme pessimism.

Moreover, we don’t see a high risk of recession in the near term since consumer balance sheets are still in good shape and there is pent-up demand for many products in short supply (i.e. autos) as well as a resurgence in spending on services as global economies re-open further. Witness the positive earnings outlooks from major U.S. airlines over the past week. We also believe that earnings will continue to grow despite some economic weakness. 

Businesses retain pricing power and strong balance sheets. While stock valuations are extended in the largest S&P 500 companies, the valuations of the rest of the index is actually right in line with historical averages. Banks, consumer discretionary and energy sectors are trading at discounts to long-term valuations and trading as if we have already entered a recession. Those present the best opportunities in our view. Some large tech stocks are also looking interesting and the earnings reports this week will shed some light on how they are holding up.


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John Zechner's Top Picks

John Zechner, chairman and founder of J. Zechner Associates, discusses his top picks: Fedex, Crescent Point Energy, and CI Financial Corp.

Federal Express (FDX NYSE)

Latest purchase at US$200, April 2022

FedEx remains a strong play on a transport sector recovery and growth in e-commerce, yet it trades at only a 10 multiple of expected earnings over the next year and a significant discount to UPS, its largest competitor. Worries about competition from Amazon moving into the delivery business are overdone as FedEx focuses more on improving operating margins in its ground business as opposed to expansion.  The company has a global footprint in operations and will continue to benefit from increased deliveries as e-commerce trends in goods expands further.

Crescent Point Energy (CPG TSX)

Latest purchase at $8.50, April 2022

Most names in the energy sector are still under-valued relative to current oil prices and are behaving in a more ‘investor friendly’ way as they use excess cash generation to pay down debt, increase stock buybacks and initiate or increase dividends. CPG, however, has more upside than most in our view as prior management teams had been too focused on land acquisitions which were financed largely by excessive equity issuance. This lead to years of stock underperformance. Management has now focused on consolidating its producing assets into fewer core regions and the stock has started to reflect this, yet still trades at only about 3 times operating cash flow and over a 20 per cent free cash flow yield.

CI Financial Corp (CIX TSX)

Latest purchase at $18.50 April 2022

The asset management stocks have been the weakest parts of the financial sector over the past six months and this has created great opportunities. CI has pivoted from the slow growth mutual fund business to an acquirer of Registered Investment Advisors (RIAs) in the U.S. The additional debt incurred to make these acquisitions has made investors nervous and the stock has sold off more than 40 per cent. But the RIA business has better growth characteristics and higher valuations due to the ‘stickiness’ of the business and the higher margins. CI plans to spin out this unit as a separate entity which should help to highlight its relative value and allow some debt reduction. Meanwhile, the company and the insiders have been active buyers of the stock as it trades around five times cash flow and under 10 times earnings. 





PAST PICKS: April 19, 2021

John Zechner's Past Picks

John Zechner, chairman and founder of J. Zechner Associates, discusses his past picks: Arc Resources, Rogers Communication, and Martinrea International.

Arc Resources (ARX TSX)

  • Then: $7.83
  • Now: $16.74
  • Return: 114%
  • Total Return: 118%

Rogers Communications (RCI/B TSX)

  • Then: $61.68
  • Now: $73.28
  • Return: 19%
  • Total Return: 22%

Martinrea International (MRE TSX)

  • Then: $13.93
  • Now: $7.88
  • Return: - 43%
  • Total Return: - 42%

Total Return Average: 33%