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

MARKET OUTLOOK

While some recent economic data has surprised to the upside, we attribute that mostly to the veracity of the initial decline and some initial re-opening buoyancy. We are wary of the optimism as airlines, restaurants, theatres, theme parks and shopping malls will not be returning to normal levels for a very long time — if ever. 

Given the overall strength of the second quarter rally and the economic risks still present, we lightened stock positions throughout the portfolio and shifted further towards safer, higher-yield stocks. We sold oil stocks after recent gains as we see the market struggling to move prices beyond the current US$40 range, where few energy stocks are profitable. 

Rather than taking large “macro” positions on the stock market, we have stuck closer to a “market-neutral” strategy over the past month by having core long positions in gold while maintaining and adding to positions in defensive and growth areas such as utilities, pipelines and telecom. These areas have dividend yields of 6 per cent or more and valuations of less than 10 times operating cash flows, which compares very well to the more expensive high-growth sectors without the risk associated with more cyclical sectors. We added Canadian banks in March and bought more in the past month as the major six banks all kept their dividends intact and maintained sufficient capital ratios despite three-fold increases in loan loss provisions and a dour outlook for growth.

Although we see little opportunity in bonds at the current time, we added to preferred shares, particularly those with strong credit ratings and little risk of lower rate resets. The sector right now is generating dividend yields of over 7 per cent, with few missed payments or cuts. These are the types of low risk, low volatility and high-yield opportunities that we would prefer to invest in now rather than rolling the dice on an expectation of a recovery to pre-pandemic levels .

TOP PICKS

Shaw Communications (SJR/B TSX) - Latest purchase: $19 in March 2020 

In the current slower-growth environment the telecom sector provides the best risk/reward combination for investors with low volatilty, free cash flow generation and strong dividend growth. Less appreciated are the benefits of owning all the long-life spectrum and communications infrastructure assets at a significant discount to other long-term capital assets.  Shaw trades below six times EV/EBITDA, generates significant free cash flow and has paid down acquisition debts. Results reported Friday beat expectations as the growth of Shaw/Freedom wireless looks better than the incumbents and they have a relatively stronger balance sheet with lower expected spectrum cost.  COVID-19 impacts (store closures and subdued subscriber activity) have been managed well and broadband trends are improving with the growth of 5G and streaming expected to increase.

Keyera Corp (KEY TSX) - Latest purchase: $18 in May 2020  

Keyera’s primary operations consist of gathering, processing and fractionation of natural gas in Western Canada; storage and transportation of crude oil and natural gas by-products; and marketing of natural gas liquids. Due to falling prices the company reduced capacity at some of its 15 natural gas processing plants. With recovering oil prices and narrow liquids differentials, midstream companies with commodity-exposed segments will experience tailwinds heading into the third quarter. Keyera has also maintained guidance on marketing cash flow for the year. With one of the better balance sheets in the sector, a valuation discount to the group and a dividend yield of over 9 per cent, this stock offers safety, growth and income.

iShares Silver Trust (SLV NYSE) - Latest purchase: US$13 in March 2020

This fund is a pure play on silver without the associated risks of mining companies. Silver will benefit from the same factors that have lifted gold to recent highs, including negative real interest rates, massive global debt growth and a weakening U.S. dollar. Silver has been in a bear market for nine years, with the gold/silver ratio now about 100 times, more than double the long-term average. Conditions are improving now with record deliveries happening on the Comex and the metal also benefits from more industrial applications than gold. Silver typically outperforms gold in the later stages of bull markets, as in August 1979-January 1980 and August 2010-April 2011. We see the ETF as a good way to add precious metals exposure.

PAST PICKS: SEPTEMBER 9, 2019

Open Text (OTEX TSX) 

• Then: $54.47
• Now: $57.97
• Return: 6%
• Total return: 8%

Vaneck Vectors Gold ETF (GDX NYSE)

• Then: $27.73
• Now: $38.81
• Return: 40%
• Total return: 41%

Baytex Energy (BTE TSX) 

• Then: $1.86
• Now: $0/86
• Return: -63%
• Total return: -63%

Total return average: -5%

TWITTER: @jzechner56 
WEBSITE: www.jzechner.com