John Zechner's Top Picks
FOCUS: North American large cap stocks
If the ‘January effect’ truly exists and those returns are prelude for the rest of the year, then investors had better put on their crash helmets and strap on their seat belts for the ride in 2022!
Stocks swooned in the first month of the year, mirroring a similar sell-off that started in 2016, coincidentally also a time when the U.S. Federal Reserve started to remove the extreme monetary ease that had existed since the financial crisis in 2008.
But this time around, the ‘pivot’ to tighter policies appears more aggressive as the Federal Reserve prepares to drain liquidity from the financial system to cool the inflation that its policies partially stoked.
Almost every asset class outside of energy has hit a rough patch in 2022, from stocks to bonds to crypto. The reality that seems to be setting in for investors is that the so called ‘Fed put,’ which has rescued market sell-offs with new rounds of monetary easing on every sell-off might be Ka’put’!
That narrative has changed and getting inflation under control is the more urgent requirement. While a 20-25 per cent drop in the S&P 500 might lighten the Fed’s resolve to raise interest rates, don’t expect them to come to the rescue of stocks for a 10-15 per cent correction!
The other headwind for stocks comes from earnings, which had been the ‘magic powder’ that sustained the bullish outlook. Rising wage and material costs, as well as product shortages and continued supply chain issues, are raising costs for many companies. If that growth is decelerating, that’s a problem since expectations are so high in the tech group which are ‘priced for perfection’ and any shortfalls relative to those expectations are not taken well.
Our strategy continues with above-average cash levels and a focus on high-dividend stocks with some pricing power, stable earnings and low valuations. However, we also watch the sell-off in growth stocks and look for re-entry points on weakness in the large-cap tech sector.
MDA Ltd. (MDA TSX)
Latest purchase $10.00 – December 2021
MDA returned to the public market in 2021 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.
Alphabet Inc (GOOG NASD)
Last bought US$2,700 – January 2022
Although we’ve reduced tech exposure, Alphabet continues to stand out as the best combination of growth and valuation. While dominant positions in search and online advertising drive the narrative, the company is also a major player in cloud services as well as having huge value in under-monetized assets such as the Android operating system for wireless devices, YouTube and Waymo (automated driving). Fourth-quarter results showed how dominant they remain in online advertising and search. Even with all this potential, the stock trades at only a very slight premium to the market.
Torex Gold (TXG TSX)
Last bought $12.00 – January 2022
Gold stocks lagged the market last year and are trading at multi-decade low valuations. Competition from crypto currencies and a stronger U.S. dollar have been a headwind for gold but negative real interest rates, higher inflation and a recovery in the global economy outside of the U.S. will buoy other currencies and support gold.
Torex is in a net positive cash position, trades below 0.5 NAV and an EV/EBITDA multiple of only 3 times. Some concern over peak production at its main El Limon property has restrained the valuation but there is potential growth from the fully funded development of their Media Luna property should support future growth.
PAST PICKS: February 1, 2021
Rogers Communications (RCI/B TSX)
- Then: $58.05
- Now: $65.26
- Return: 13%
- Total Return: 16%
General Motors (GM NYSE)
- Then: $51.51
- Now: $51.85
- Return: 0.136%
- Total Return: 0.136%
Air Canada (AC TSX)
- Then: $20.42
- Now: $23.33
- Return: 14%
- Total Return: 14%
Total Return Average: 10%