John Zechner, chairman & founder, J. Zechner Associates
FOCUS: North American large cap stocks

MARKET OUTLOOK

The simple reality is that stock valuations are at all-time highs by most traditional measures, at a time when the biggest tailwind (accommodative monetary conditions) is being removed.  But bull markets don’t necessarily ‘die of old age’ or due to excessive valuations alone.  The catalyst for almost every bear market has been an economic recession and we don’t see recessionary risks over the next two years at least, given all the stimulus and pent-up consumer demand still in the pipeline.  The bigger risk in our view would be off a sharp correction (10-15 per cent) as inflation has become embedded in wage expectations and ongoing supply chain issues remain persistent.  Central banks would then have to act even more aggressively to control it.  As seen from the sharp pullback in the high growth sectors, the valuations of this market cannot handle any sharp increase in rates.  If that occurs then 2022 could end up looking a lot like 2018.  Earnings expectations are also contingent on a continued return to more normal economic conditions.  Any shortfalls there would have a particularly negative impact on the airline, retail, energy and financial sectors.  While the virus risk remains front and centre, the growing global level of vaccinations and ongoing biological advances in dealing with variants, seems to be mitigating this risk a bit.  That was clear in how quickly stocks moved back to new highs following the Omicron news.  Despite the risks, we still like Canadian equities heading into 2022.  Canadian stocks have lagged the U.S. for most of the past decade during which time growth stocks lead the more economically sensitive ‘value sectors’ that are more prevalent in Canada.  We expect trend to reverse in 2022 and investors will focus more on companies with inflation-hedged earnings growth, low valuations and higher dividend yields.    Financials, energy, telecom, pipeline and industrial stocks all fit that definition and make up a larger portion of the Canadian market.  For technology exposure we are starting to see better valuations in some of the truly ‘beaten-up’ mid-sized companies while still maintaining reduced holdings in ‘big cap US tech.’

TOP PICKS

General Motors (GM:UN) – Last bought US$53, Dec/21 

Our simple thesis is that, if Tesla can command a market cap of over a trillion dollars, then GM should be worth more than US$85 billion.  especially considering that it produces over six times as many autos annually.  GM has plans double revenue to about US$300 billion by 2030. That includes US$90 billion in sales of electric vehicles. GM also has controlling stake in Cruise, a top player in autonomous driving that plans to roll out robo-taxis.  The company can finance this growth from its legacy combustion engine business, yet still trades at earnings multiple well below that of the overall market. Investors are skeptical that GM can manage a tricky EV transition and achieve anything close to its ambitious goals, but the stock already discounts a lot of doubt.

Manulife Financial (MFC:CT)  Last bought $23.50 – Dec.2021   

Financials, and lifecos in particular, have lagged the overall market since the recovery in March, 2020.  However, the valuation of Manulife seems totally out of context with the actually status of the business.  Earnings exposure to market volatility has been reduced sharply over the past decade while capital ratios have been fortified.  Trading at under 8 times core operating earnings with a dividend yield of 4.6 per cent it fits exactly the profile of companies we like for next year.  The recent monetization of its variable annuity business in the U.S. amply demonstrated how some of its assets are under-valued.  Worries about growth in its Asian unit are also overdone, given its operating history in that region.

MDA Ltd. (MDA:CT)  Last bought $15.50 – August 2021   

MDA returned to the public market this year as a global leader in orbital robotics and satellite infrastructure/subsystems.  It is generating positive free cash flow and an attractive valuation.  Opportunity continues to exist in the low-Earth orbit (LEO) satellite constellations driven by the demand for internet communications as governments act to improve internet access.  A very strong balance sheet will support capital spending as it rolls out new programs.   MDA projects annual revenue growth of over 25 per cent over the next five years as several key ‘flagship programs’ roll out, but some delays this year lead to a wave of year-end selling that has, in our view, created a great, long-term buying opportunity. 

 

PAST PICKS: December 29, 2020

Shaw Communications (SJR/B:CT)

• Then: $22.43
• Now: $38.36
• Return: 71%
• Total Return: 76%

CIBC (CM:CT)

• Then: $109.58
• Now: $147.47
• Return:  35%
• Total Return: 40%

Tourmaline Oil (TOU:CT)

• Then: $16.95
• Now: $40.61
• Return: 140%
• Total Return: 148%

Total Return Average: 88%
 

Personal Twitter Handle:  @jzechner56
Company Website:   www.jzechner.com