John Zechner, chairman and founder of J. Zechner Associates

Focus: North American large caps

MARKET OUTLOOK

Global economic and profit growth has peaked for this cycle in our view. Leading economic indicators from the industrialized (OECD) countries have fallen for 12 straight months with European and Asian growth slowing. GDP growth was actually negative in both Japan and Germany in the third quarter!

While the U.S. exhibited relative strength, we have seen recent weakness in housing, industrial production and many sentiment indicators. While headline inflation numbers are still contained, we are seeing rising input costs and other price pressures which have necessitated the continued removal of the easy money conditions that have characterized the last 10 years. Record global debt levels and rising interest rates should lead to retrenchment in consumer and business spending thus limiting further expansion. Profit margins have peaked due to rising input costs (wages and basic materials), while the U.S. tax cuts are now diminishing in impact. Pre-tax earnings growth has dropped to almost zero and we expect overall profit growth to come in below expectations in 2019, perhaps going negative.

Within our managed portfolios we maintain a defensive bias due to our continued belief that we are late in this economic cycle and growth is slowing down. Stock weights remain below average levels. While the sharp fall in stocks in the fourth quarter has created some better buying opportunities and we have added back to some names in the industrial and technology sectors, we still think that earnings estimates for 2019 need to come down, especially in the financial and consumer sectors. We also expect rising interest rates to provide competition to stock returns as well as increasing the risk of a “negative liquidity event” due to the proliferation of new investment products created in the low interest rate environment.  

On the positive side, we expect some overall recovery in commodity prices as China moves to stimulate growth again and, more importantly, the U.S. dollar comes under pressure due to massive deficit funding requirements over the next few years and somewhat less aggressive moves than expected by the U.S. Federal Reserve. Gold and uranium stand out as our top commodity picks.

TOP PICKS

URANIUM PARTICIPATION CORP (U.TO)

Recently purchased in December 2018 at $4.35.
This company is a direct play on Uranium and is currently reflecting a Uranium price of US$26, while the spot market price is $28.00. Contract prices are even higher and the long-term cost to develop new uranium supply is closer to US$60 per pound. Excess global supplies are being reduced and new nuclear facilities are being built globally, especially in China, which means a sustained period of demand growth.  Annual global demand is almost double the current annual supply. Prices will get squeezed higher as inventories are run down. We also expect a weaker dollar in 2019 contribute to an overall jump in commodity prices and this is a pure play on the commodity, at a discount, without any of the production and other risks associated with owning the miners directly.

 MAXAR TECHNOLOGIES (MAXR.TO) 

Recently purchased in December 2018 at $16.
The satellite and space systems manufacturer and operator has fallen over 40 per cent in 2018 despite the successful acquisition of Digital Globe in 2017; which helped to integrate its total satellite orbit offerings by putting together the satellite manufacturing business of MacDonald Dettwiler with the mapping and data capabilities of DGI. But a negative research report by Spruce Point Capital Management, a hedge fund with a track record of launching negative campaigns against North American public companies after taking a short position in their stock, caused investors to “sell first and ask questions later.” Investors remain in a “show me” mode and it will take some quarters of earnings growth to convince the skeptics (and short sellers) that the stock has more upside than downside. Improvement of free cash flow with a priority to pay down debt is of primary importance. Strong free cash flow generation will allow them to pay down acquisition debt relatively quickly. Valuation exceptionally low at under eight times forward earnings and seven times forward enterprise value to earnings before interest tax, depreciation and amortisation (EV/EBITDA). Biggest risk is a gradual shift away from the geo-satellite market in favour of other monitoring instruments such as drones.

FEDEX CORP (FDX.N)

Recently purchased in December 2018 at US$152.
FedEx lowered guidance after beating expectations last quarter but still expects earnings per share of $15.50 to $16.60 in 2019, putting the stock at a 10 or lower multiple on next year’s earnings for a company with a global footprint and positioned for continued growth in e-commerce deliveries. The forecast assumes “moderate” U.S. domestic growth and no further weakening in international economic conditions. 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 perceived risk for investors is the impact of Amazon’s in-house shipping projects on FedEx, in addition to the logistic giant’s correlation to the weakening growth for the global economy.

PAST PICKS: FEB. 15, 2018

OPEN TEXT (OTEX.TO)

• Then: $44.12     
• Now: $44.33      
• Return: 1%         
• Total return: 2%

QUALCOMM (QCOM.O)

• Then: $65.28     
• Now: $56.51      
• Return: -13%     
• Total return: -10%

VANECKS VECTORS OIL SERVICES ETF (OIH.N)

• Then: $24.20     
• Now: $13.85      
• Return: -43%     
• Total return: -42%

Total return average: -17%

FUND PROFILE

JZAI Global Hedged Growth Fund

Performance as of Oct. 31, 2018        

• 1 month: 1.68% fund, -6.27% index
• 1 year: -0.98% fund, -3.41% index
• 5 year: 2.14% fund, 5.14% index

Index: Fundata Inc.

Returns are net of fees.

TOP 5 HOLDINGS AND WEIGHTINGS

As of Dec. 27, 2018.

1. Long: SPDR Trust Unit S&P 500 (SPY): 6.86%
2. Long: iShares Russell 2000 ETF: 4.91%
3. Long: FedEx Corp: 4.50%
4. Long: IBM Corp: 4.15%
5. Short: VanEck Vectors Steel ETF: 3.92%