John Zechner, chairman and founder of J. Zechner Associates

Focus: North American large cap stocks

MARKET OUTLOOK:

The current global recovery is being fuelled by the combination of monetary ease and fiscal stimulus in the U.S., which reminiscent of those from 1980-2008, versus the recovery from the Financial Crisis, which was spearheaded by stimulus from China. The recovery is leading to some firming in interest rates, which clearly was a ‘wake-up call’ in the last two weeks of February, with pullbacks in many of the high growth winners of the past year of between 10-15 per cent. While no one knows if there is a key ‘breaking point’ in terms of when stocks would succumb to rising rates like they did in 2018, stocks cannot absorb a surge in bond yields, especially when the growth pocket of the market is priced for perfection.

Hardest hit in this brief sell-off were the leaders of the past year, those growth stocks that may not have any real earnings but lots of potential, which gets rewarded so much more when long-term interest rates are at record lows. While stocks maintain their overall upward momentum, we have continued to take profits in the more volatile sectors, including precious metals and growth stocks, while adding to cyclical positions in the resource sector as well as financials.

Our overall stock market weight remains close to the long-term average of 45-50 per cent. We have also focused on higher yield stocks in the telecom, banking and pipeline sectors as well as an 8-10 per cent position in preferred shares, which have benefitted from a stronger corporate outlook as well as a firming in interest rates. We have maintained a relatively low cash position as well as an underweight in bonds, where we continue to see minimal returns as well as risk from rising interest rates.

TOP PICKS:

BCE Inc. (BCE TSX) recent purchase $56.00, Mar/21

Trading at only about seven times operating cash flow and a dividend yield over six per cent, we see this as a solid play on increased streaming. Headwinds of elimination of overage fees and reduced roaming fees on annual growth will also diminish. In our view, the telecom sector provides the best risk-reward combinations for investors with low volatility, cash flow growth and a strong dividend growth model. These companies continue to benefit as being the ‘highways’ for the continuing massive growth in high bandwidth data flow and their ability to ‘bundle’ those services for consumers. Less appreciated are the benefits of owning all the long-life spectrum and other communications and infrastructure assets, at a significant discount to other long-term capital assets. The proposed Rogers-Shaw combination highlights the values inherent in this sector.

General Motors (GM NYSE) recent purchase US$49, Jan/21

Our simple thesis is that, if Tesla can command a market cap of over US$700 billion, then General Motors should be worth more than $70 billion, especially considering that it produces over six times as many autos annually, generates strong free cash flow and is going to take 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. Auto sales should also benefit from renewed stimulus plans in the U.S. as well as increased travel as the global economy begins to re-open more.

Arc Resources (ARX TSX) recent purchase $7.65, Mar/21

Arc has become the newest name among senior producers after revealing it is buying Seven Generations Energy, the latest deal to consolidate producers in the natural gas-rich Montney region of British Columbia and Alberta. The combined company will become Canada’s largest condensate producer and third-largest natural gas producer. We see many positives with the deal, from cost savings, capital allocation opportunities and the larger size of the company being advantageous when dealing with marketing partners and accessing capital markets. The merger between ARC and Seven Generations gives the scale both companies needed to be more institutionally relevant with global investors.

PAST PICKS: April 13, 2020

Enbridge (ENB TSX)

• Then: $39.80
• Now: $45.32
• Return: 14%
• Total Return: 23%

Martinrea International (MRE TSX)

• Then: $7.80
• Now: $13.48
• Return: 73%
• Total Return: 75%

BCE Inc. (BCE TSX)

• Then: $58.00
• Now: $56.95
• Return: -2%
• Total Return: +4%

Total Return Average: 34%

Personal Twitter Handle: @jzechner56

Company Website: www.jzechner.com