Full episode: Market Call for Monday, February 1, 2021
John Zechner, chairman and founder of J. Zechner Associates
Focus: North American large cap stocks
Despite continued easy money policies from central banks, we believe there will be some upward pressure on longer-term interest rates. The cyclical/resource sectors of the stock market should start to play some ‘catch up’ to the growth sectors of the market, which are elevated due to low interest rates. While excessive bullishness and some concerning technical market trends pushed us to reduce our exposure to stocks slightly in the short term, we still remain close to fully invested. Our sector weights have shifted significantly, though, taking money out of growth sectors like health care, technology, consumer staples and utilities and shifting more funds into financials, energy, industrial products and consumer discretionary groups. Bottom line for investors: there is clearly a lot of short-term risk due to excessive speculation, extended valuations and pandemic-related economic risks. We believe we are at the beginning of a new economic cycle and the lockdown measures and vaccines will bring the pandemic under control. With continued support from both fiscal and monetary policies, we expect good economic tailwinds later this year and onward. Record debt levels will have to be addressed at some point, but the over-arching news stories this year will be better economic numbers and a strong profit recovery. Investors may want to ask whether the potential reward for staying in the market will offset possible damage from a downturn. We believe the trajectory for stocks over the next few years will be higher, in line with a rebounding global economy, and we hesitate to missing gains due to shorter-term risk concerns. A better strategy is to position in names where valuations are reasonable, growth is tied to an economic recovery and dividend yields can supply some income during more volatile periods.
Rogers Communications (RCI/B TSX) - Last purchased at $59, Jan/21
The telecom sector remains one of our highest conviction bets over the long term. In a market where investors are looking for ‘long duration assets’, companies in this sector have built out massive networks to host the growing need for data, increased streaming activity and the shift to 5G - making them a great ‘infrastructure play’ at a substantial discount. While these stocks have lagged many other growth stocks in the past year due to reduced roaming activity and eliminated internet ‘overage fees’, Rogers pays an attractive dividend (with growth potential), generates substantial free cash flows and should see a pickup in operating cash flows again in 2021.
General Motors (GM NYSE) – Last purchased at US$49, Jan/21
Our simple thesis is if Tesla can command a market cap of over US$800 billion, then GM should be worth more than $70 billion. GM produces over six times as many autos as Tesla annually, generates strong free cash flow and is taking its brand names into electric vehicles with spending plans of over $25 billion over the next decade. 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.
Air Canada (AC TSX) - Last purchased at $20, Jan/21
The company is still generating losses on a daily basis due to travel restrictions and the stock is down over 60 per cent in the past year. However, Air Canada has reduced costs and fortified their balance sheet so they are able to survive this downturn and position for growth in the recovery. The pending acquisition of Air Transat could be very timely, as we believe while business travel may never return to its pre-pandemic levels, personal travel will return robustly as people will want to visit relatives and take holidays after a very long hiatus. Strong, well-financed players like Air Canada will emerge in a stronger industry position to capitalize on this growth.
PAST PICKS: February 10, 2020
Blackberry (BB TSX)
- Then: $8.08
- Now: $17.02
- Return: 111%
- Total Return: 111%
Maxar Technologies (MAXR TSX)
- Then: $23.70
- Now: $54.78
- Return: 131%
- Total Return: 132%
Rogers Communications (RCI/B TSX)
- Then: $66.32
- Now: $57.79
- Return: -13%
- Total Return: -10%
Total Return Average: 78%
Personal Twitter handle: @jzechner56
Company website: www.jzechner.com