John Zechner's Top Picks: July 8, 2021

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John Zechner's Top Picks

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John Zechner, chairman and founder of J. Zechner Associates

Focus: North American large caps

MARKET OUTLOOK:

The value/cyclical/resource sectors have lead the stock market for most of this year, helping the Canadian market outpace the U.S. for only the second time in the past decade. But in the past month we have seen a return to the ‘high growth’ names as the U.S. Fed, in particular, supports continued monetary ease on the belief that current surge in inflation will be transitory. The perplexing rally in bonds at a time when inflation and economic growth each hit 13-year highs is indicative of both a belief economic growth may fade as stimulus slows down and the continued US$120 billion monthly buying by the Fed.

Bottom line for now is that ‘the markets seem to be buying what the Fed is selling!’ But we expect that supply chain distortions, growing demand from the re-opening and an underinvestment in commodities and infrastructure over the past decade will keep cyclical inflationary pressures in place longer than investors might expect. We therefore have been adding to cyclical exposure on weakness, particularly in financials, energy and industrials. Our target weight for these sectors in our stock portfolios is 60-70 per cent. The longer-term trend toward disinflation from globalization and increased technology remain in place, which argues for holding 20-30 per cent of stocks in large cap growth stocks with reasonable valuations in health care, tech and telecom. We remain overweight preferred shares as slightly higher interest rates and stronger credit conditions fuel buying in that asset class but are underweight bonds where we see little, if any, absolute return potential and would rather just hold cash as a hedge against any market volatility and look for buying opportunities if any weakness occurs in stocks.

TOP PICKS:

John Zechner's Top Picks

John Zechner, chairman and founder of J. Zechner Associates, discusses his top picks: Martinrea International, MDA Ltd. and VanEck Vectors Semiconductor ETF.

Martinrea International (MRE TSX) Latest purchase $13.00 – May, 2021.

This stock has multiple attractions as is has an exceptionally low valuation but some earnings cyclicality that will allow it to outperform strongly as the global economic recovery continues. The company has a strong balance sheet and generates positive free cash flow. It has a focus on the ‘lightweighting’ of vehicles through greater use of aluminum parts, a key factor in meeting the growing demand for electric vehicles without the associated valuation risks. The company had the added benefit of an investment in VoltaXplore, which gives it EV battery exposure. The heavily discounted valuation provides an opportunity much like it did at market lows in 2009 and 2016. Insiders at the company have also been active buyers of the stock recently, another endorsement of the attractive valuation and growth.

MDA Ltd. (MDA TSX) Latest purchase $15.00 – May 2021

MDA returned to the public market this year as the former MacDonald Dettwiler was sold by Maxar to private equity in 2019. A global leader in orbital robotics and satellite infrastructure/subsystems, it is generating positive free cash flow, has a strong balance sheet and trades at an attractive valuation. Opportunity exists in the low-Earth orbit satellite constellations driven by the demand for internet communications as governments act to improve internet access. NASA also expects its budget for commercial low earth orbit operations to grow from US$17 million in 2021 to US$184 million in 2023. Spending by NASA becomes revenue for commercial space companies. MDA projects annual revenue growth of over 25 per cent over the next five years as several key ‘flagship programs’ roll out.

VanEck Vectors Semiconductor ETF (SMH NASD) Latest purchase US$230 – April, 2021

This ETF encompasses the largest global players in the chip industry, with five per cent+ positions in Taiwan Semiconductors, Intel, LAM, Texas Instruments, Applied Materials, Broadcom and Qualcomm. We view the semis as the ‘industrial sector’ of the next age of growth and should be a part of any growth portfolio. We have seen extraordinary demand for semiconductors over the past year due to the effects of the pandemic as the work-from-home era has spurred sales of laptops, cell phones, appliances, autos and other personal use items, all of which come with customized chips. The excess demand and supply chain issues lead to a shortage, which has most negatively impacted auto sales, but these shortages are easing. The growth of cloud servers and 5G communications will further spur growth in this industry. Valuations are high relative to the past, but the growth trajectory also looks more secure.