John Zechner, chairman and founder, J. Zechner Associates
FOCUS: North American Large Cap Stocks
MARKET OUTLOOK:
The stock market has been surprisingly resilient so far this year as the Silicon Valley Bank failure was unable to keep the averages down as the tech stocks rallied on more optimism that interest rates are close to peaking. While stocks have never started a new bull market before a recession has actually begun, we believe that we’ve already seen the lows for this cycle last October. Stocks will most likely remain in this ‘trading range’ of S&P500 Index 3700-4200 for the rest of 2023, but the bias for the next major move is probably to the upside, especially with extremely bearish and defensive positioning that could unwind at any time. In terms of asset mix for clients, we recently took profits on our U.S. Treasury Bond trade and reduced our overall bond exposure closer to our benchmark weight of 40 per cent. With the U.S. Fed still planning to hold firm on short-term interest rates near 5 per cent, we see little room for longer-term U.S. bond yields to fall much further from their current level of around 3.3 per cent.
On stock exposure, we went into March with an equity weight of about 40 per cent, right at the bottom end of our normal 40-65 per cent range. We used the weakness from the banking crisis to add back some stocks and move that weight back to around 45 per cent. We added Canadian and U.S. bank exposure, but that was from a position of almost no holdings in the sector, and we still remain underweight the group until we see how the current crisis unfolds. Our preference is for the major players in both markets, including Bank of America, Citigroup, Visa, TD and Bank of Montreal. In terms of overweight sectors. we added to energy stocks on the recent weakness. Oil prices are supported by low inventories, reduced production in the U.S. and a bump in demand from the re-opening of the Chinese economy. Meanwhile, the valuation of these stocks is exceptional, with free cash flow yields of over 20 per cent at the current WTI oil price of US$75 and cash flow multiples of under four times. Most energy companies are also returning more of their excess capital to shareholders via stock buybacks, increased dividends and debt re-payment. Top names include Cenovus, Crescent Point and Baytex Energy. We also still like the pipeline stocks for their moderate valuations and high dividend yields. Ditto for the Telecom Sector (BCE, Rogers and Telus) where they also have continued growth from data services.
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TOP PICKS
PayPal Holdings (PYPL NASD)
PayPal is a technology platform that enables digital payments that connects merchants and consumers with 426 million active accounts across more than 200 markets. Its brands include PayPal, Braintree and Venmo, among others. It is a great play on electronics payments growth, generates strong free cash flow and trades at under 20 times forward earnings. Moreover, management has a renewed focus on profitability that is being supported by new activist investor Elliott Management. Massive selloff in the high growth sector last year has created a great, long-term buying opportunity.
MDA is a global leader in orbital robotics and satellite infrastructure/subsystems. It is generating positive free cash flow and trades at an attractive valuation. The recent buyout of industry comparable Maxar, at more than a 100 per cent premium and 12 times operating cash flow, demonstrates the demand for such growth players from private equity. Opportunity continues to exist in the low-Earth orbit (LEO) satellite constellations driven by the demand for internet communications and ‘space data’ from satellites. MDA projects annual revenue growth of over 25 per cent over the next four years as key ‘flagship programs’ roll out, but some delays this year lead to a wave of year-end selling that has created a great, long-term buying opportunity. MDA recently reported Q4 results that were ahead of Street expectations and management guidance with particularly strong EBITDA.
BRP is engaged in the design, development, manufacturing, distribution and marketing of powersports vehicles and marine products. The stock trades at exceptionally low valuation of about eight times forward earnings despite beating estimates in eight quarters over the past three years as they continue to pick up market share from competitors due to stronger product offerings and introductions of new models. Investors are overly worried about an impeding economic slowdown and pricing the stock for a worst-case scenario. The company is generating strong cash flow, has a good balance sheet and could continue buying its own stock.
PAST PICKS: April 26, 2022
- Then: $200.00
- Now: $233.39
- Return: 17 per cent
- Total Return: 19 per cent
Crescent Point Energy (CPG TSX)
- Then: $8.55
- Now: $10.05
- Return: 18 per cent
- Total Return: 22 per cent
- Then: $17.28
- Now: $12.34
- Return: -28 per cent
- Total Return: -25 per cent
Total Return Average: 5 per cent
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| FDX NYSE | N | N | N |
| CPG TSX | Y | Y | Y |
| CIX TSX | Y | Y | Y |
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