John Zechner, chairman and founder, J. Zechner Associates

FOCUS: North American large-cap stocks  


After a tough year for all asset classes in 2022, this year has seen gains for a very narrow group of large technology stocks. This group recovered on strong earnings, an upward revision to valuations and an investor frenzy for anything related to AI. 

The lack of breadth in the market is the worst since the tech bubble in 1999 as the equal-weighted S&P 500 trails the market-weighted S&P 500 by over 10 per cent this year alone. Going forward we believe that macroeconomic factors will continue to dominate the investment environment. 

As a result of the initial round of interest rate increases, inflation has fallen from between eight and nine per cent to around the four to five per cent range. However, inflation in the service sector remains high and is not pulling back. More work has to be done to get these rates down. Central bankers know from data during the 1970s the risks of re-igniting inflation if they ease back on rates too quickly, so we believe the optimism around an end to the rate increases and pivot in policy to easing are unfounded. Rates are going to stay “higher for longer” until we see more serious cracks in economic growth. 

This bodes poorly for stocks overall but so far has only been felt in most of the cyclical sectors such as energy, basic materials, consumer discretionary, real estate, financials and industrials. The good news is that investors have already positioned themselves for most of the expected weakness as cyclical sector valuations are already near recessionary levels. That should limit any further downside to the lows of last October. 

We see little ability for tech to continue to lead the market on rising valuations. The sector is too large now not to be influenced by economic conditions, irrespective of a major shift in spending to AI. In terms of strategy, we have recently added to positions in the bond market on the view that growth will turn negative later this year. We have reduced exposure to tech, metals and financials but have stayed with the energy trade due to the extremely attractive valuations and a tighter physical market for oil than is reflected in the futures trading.   

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John Zechner's Top Picks

John Zechner, chairman and founder of J. Zechner Associates, discusses his top picks: Crescent Point Energy, Rogers Communications, and Pfizer.

Crescent Point Energy (CPG TSX) 

Latest purchase $8.25 March, 2023.

Canadian oil stocks are cheap across the board after selling off on worries about slowing demand from China and a recession in North America. The stocks are undervalued at current oil prices but we also believe the physical market for oil is much tighter than futures indicate so there is an upside. Crescent Point has done a great job of consolidating its assets to core profitable regions and recently added Montney oil field assets in Alberta for $1.7 billion, which will significantly grow its presence in what is one of North America’s largest unconventional petroleum plays. The company said the assets, which are adjacent to the Kaybob Duvernay assets it acquired last year, will increase Crescent Point’s excess cash flow by 20 per cent within the first year of its closing. It also continues to pay down debt and buy back stock using excess free cash flow.

Rogers Communications (RCI.B TSX) 

Latest purchase $60 April 2023.

Rogers has traded down recently over worries about its ability to finance the acquisition of Shaw Communications. The fundamentals of the company continue to improve though with strong wireless results and the bundling of phone, wireless, internet, TV and home security all helping to solidify the customer experience. Streaming also adds to the demand for their services, which have proved resilient in all economic scenarios.  The stock trades at only seven times the forward operating cash flow, generates strong free cash flow and continues to grow.

Pfizer (PFE NYSE)

Latest purchase US$38 May 2023.

Pfizer stock has fallen more than 40 per cent from its 2022 high as a drop in COVID-19 vaccines has reduced revenues and earnings. However, the company has done a great job of using the windfall of COVID-19 vaccine revenues to add to its pipeline of growth including the recently announced diabetes drug which induces a comparable level of weight loss to Novo Nordisk’s Ozempic injection. The Food and Drug Administration also granted full approval to Pfizer’s COVID-19 antiviral pill Paxlovid for adults who are at high risk of getting severely sick with the virus. The stock has a dividend yield of over four per cent, trades at under 12 times earnings and should have annual earnings growth of over 15 per cent over the next five years.




PAST PICKS: June 10, 2022

John Zechner's Past Picks

John Zechner, chairman and founder of J. Zechner Associates, discusses his past picks: General Motors, Walt Disney, and Qualcom.

General Motors (GM NYSE)

  • Then: US$35.01
  • Now: US$33.67
  • Return: -4%
  • Total Return: -3%

Walt Disney (DIS NYSE)

  • Then: US$99.40
  • Now: US$87.85
  • Return: -12%
  • Total Return: -12%

Qualcomm (QCOM NASDAQ)

  • Then: US$133.20
  • Now: US$113.09
  • Return: -15%
  • Total Return: -14%

Total Return Average: -10%