John Zechner, chairman and founder at J. Zechner Associates, Inc.
Focus: North American large caps

MARKET OUTLOOK

The story in 2019 is that economic reality has been far less impressive than stock market returns. Growth is near-recessionary in Europe and Japan and has yet to recover in emerging markets such as Brazil and Mexico. Fourth quarter growth in the U.S. looks set to come in around only 1.4 per cent and probably under 2 per cent for the entire year. Thirty per cent of the U.S. economy is already in recession. We expect that employment growth with be the next domino to fall. Economic growth is likely going to remain subdued for at least the next few years. But this might be the “Goldilocks” scenario that stock investors are looking for, since this “below trend” growth would keep inflation and interest rates low. However, this tepid economic growth will make it difficult to achieve any corporate earnings growth, so we still expect profit estimates will have to be reduced further and generally see the risk/reward tradeoff as being unfavourable for stocks.

The renewed ease from central bankers and the return to record-low interest rates continue to support somewhat higher stock valuations, particularly for the defensive sectors of the market. We have maintained positions in key growth sectors of the U.S. with large technology stocks and core “reasonable-priced” names such as Disney, Alphabet and FedEx. In Canada, we like the telecom stocks as they are better value than the utility or financials stocks for safety and yield. We also like the energy sector for multi-decade low stock valuations and more shareholder-friendly corporate management behaviour. We continue to carry a 4 to 5 per cent weight in gold stocks due to historically low valuations and as a portfolio hedge. We also continue to have overweight positions in mid-term bonds as we expect a decline in interest rates and preferred shares due to their strong, absolute yields. We have reduced cash balances to levels needed for portfolio liquidity only as the return on cash remains uncompetitive to other assets.

TOP PICKS

FEDEX CORP (FDX:UN)
Last purchased in November 2019 at US$150.

The stock fell when FedEx lowered its guidance (due to slower overseas sales) after beating expectations last quarter, but still trades at only about 10 times next year’s earnings. This is an extremely good valuation for a company with a global footprint that’s positioned for continued growth in e-commerce deliveries. Management expects to see further benefits from the TNT Express acquisition. We are optimistic on FedEx’s ability to offset weaker product mix with lower costs. Plus, we think the exceptionally low valuation more than discounts a more muted outlook. The biggest shorter-term risks for investors are the continuing trade dispute between the U.S. and China, the impact of Amazon’s in-house shipping projects and FedEx’s correlation to the weakening global economy.

CRESCENT POINT ENERGY (CPG:CT)
Last purchased in August 2019 at $4.

New management is now focusing on consolidating production areas and reducing financial leverage dramatically, as it generates significant free cash flow at current strip prices that it’s using to pay down debt, which should fall to less than 2 times cash flow by year-end. The recent sales of infrastructure and other assets at over 7 times cash flow compare well to the stock valuation. The company has also enacted aggressive stock buybacks, which should help valuation since it has had a traditional reputation for issuing far too much equity to fund growth. With the stock trading at a discount to net asset value and only about 3 times debt-adjusted operating cash flow, we see further upside in the stock.

BLACKBERRY (BB:CT)

Last purchased in October 2019 at $6.75.

The company under John Chen has achieved a phenomenal turnaround from a fading maker of smartphones to a pure software firm with competitive strength in cybersecurity and auto Iot software. In the process, the company has maintained positive cash flow with a strong balance sheet. However, the stock is trading near multi-year lows despite a favourable valuation, with a slide of almost 45 per cemt since March. While the company has been hurt by near-term execution issues and there is still the potential for further quarterly result disappointments in the upcoming report, investors are overlooking some key assets, such as Cylance, QNX, and Athoc, as well as the long-term growth in cybersecurity.

PAST PICKS: DEC. 31, 2018

URANIUM PARTICIPATION (U:CT)

• Then: $ 4.48
• Now: $ 4.24
• Return: -5%
• Total return: -5%

MAXAR TECHNOLOGIES (MAXR:CT)

• Then: $16.31
• Now: $14.82
• Return: -9%
• Total return: -9%

FEDEX (FDX:UN)

• Then: $161.33
• Now: $158.10
• Return: -2%
• Total return: -0.4%

Total return average: -5%

TWITTER: @jzechner56
WEBSITE: jzechner.com