John Zechner's Top Picks: August 15, 2016

Aug 15, 2016

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John Zechner, Chairman and Founder, J. Zechner Associates

FOCUS: North American Large Caps

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MARKET OUTLOOK:

Global economic growth remains weak, profit margins have peaked for this cycle and input costs, most noticeably wages, are starting to rise again. Stock valuations remain at the high end of all historical measures, supported almost completely by the zero/negative interest rate policies of global central banks. Those policies however are losing their impact and the marginal benefit of further easing is minimal, while the risks associated with this ongoing support continue to rise. Loan default risk in the Chinese banking system and global currency wars remain the biggest potential risks in our view. The bottom line for us in financial markets right now is that the stock market rally has run its course and that stocks face more headwinds in the months ahead from weak earnings, slower global economic growth, high stock valuations and less impetus from aggressive central bank policies. We have moved back to an underweight position in stocks after selling almost all of our holdings in the gold and base metals sectors. We remain overweight U.S. stocks given that we expect further weakness in the Canadian dollar and have a higher comfort level with the valuation of U.S. banking, technology and transportation stocks. We also still have an overweight position in Canadian preferred shares given their yields of close to 6 per cent and the increasing institutional interest in this sector as a source of income.    

 

Top Picks:
DHX Media (DHX’b.TO),
Last purchase $6.40, July/16. 

The world’s leading independent, pure-play kids’ content company and animation house. DHX trades at an Enterprise Value/EBITDA multiple of under 10 times, a significant discount to industry comps and recent transactions such as DreamWorks. Benefitting from the migration to digital platforms; 85 per cent of their distribution revenue comes from digital sources. Also has Global distribution to 300+ broadcasters and streaming services worldwide including their Family suite of channels in Canada and a growing roster of high-profile brands to drive increasing merchandising revenue. Also they recently added WildBrain, a multi-platform kids network that leverages global expertise, a large content library and scale to create new distribution and revenue for both DHX and other family brands. We see the stocks as a Canadian ‘mini-Disney’ as it develops kids content and then cross-markets it through a growing array of distribution channels.

Alphabet Inc Class C.  (GOOG.O), Last purchase US$700, July/16.  

The best combination of value and growth in large technology universe. Remains well positioned to benefit from proliferation of connected devices and data management, which also allows the company greater access to consumer behavior info and apply that to sales patterns. Along with Facebook, they dominate the high growth ‘online advertising’ sector. Also owns both the largest global search engine and owns the most prolific mobile software operating system (Android). Monetizing the value of its existing platform and supplementing with timely acquisitions (i.e. YouTube) from huge free cash flow. Earnings multiple in line with the overall market but growth potential much higher.

Martinrea International (MRE.TO), Last purchase at $7.70, July/16.

The stock is trading at lowest valuation of group but expecting >10 per cent earnings growth per year over next three years as recent spending to roll out new programs starts to yield results. Profit margins expanding as these new growth platforms are more fully utilized and margins continue to rise. Company also has best exposure in the industry to the increasing use of aluminum in autos, which is a substantial ongoing trend to lower overall production costs and operating efficiencies. Sector valuations exceptionally low (already pricing in the next recession) as investors worried about ‘peak auto’ sales.  But the average age of autos in North America remains near a record high and auto spending is tied to growing employment levels, suggesting less of a downturn than investors are worrying about.

Disclosure Personal Family Portfolio/Fund
DHXb.TO N N Y
GOOG.O N N Y
MRE.TO N N Y

 


Past Picks:  August 10, 2015

Open Text (OTC.TO)

  • Then: $60.29
  • Now: $81.15
  • Return: +34.60%
  • TR: +36.86%

Avigilon (AVO.TO)

  • Then: $16.06
  • Now: $13.35
  • Return: -16.87%
  • TR: -16.87%

Walt Disney (DIS.N)

  • Then: $111.00
  • Now: $97.10
  • Return: -12.32%
  • TR: -11.33%

Total Return Average: +10.44%

Disclosure Personal Family Portfolio/Fund
OTC.TO N N Y
AVO.TO N N Y
DIS.N N N Y

 

Fund Profile

J Zechner Global Hedged Growth Fund

Performance as of: July 31, 2016

  Fund Index*
3 Months 9.52% 3.44%
1 Year  41.02% 3.95%
3 Year 18.76% 4.53%

 

* Index: GlobeFund Alternative Strategies

* Returns net fees & distributions

 

Top Holdings:

Short S&P500 Index ETF (SPY) - 56%

Short iShares 20+ Yr Govt Bond(TLT) - 10%

Long SPDR Gold Trust (GLD) - 11%

Short iShares TSX Gold (XGD) - 9%

Short Teck Resources (TCK) - 8%

 

Twitter: @johnzechner

Website: www.jzechner.com