John Zechner's Top Picks
Focus: North American large cap stocks
Stocks continue to be supported by record low interest rates, fiscal spending, surging profits and a global economy recovering from the pandemic. However, the massive liquidity and a flood of new retail investors has fueled a level of speculation unlike anything since the late 1990s and should raise warning flags for all investors.
Valuations are at record levels for those companies with actual earnings and even higher for many ‘growth’ companies that are pre-earnings; valuations of Rivian and Lucid make Tesla look like a deep value, blue chip stock! When speculative fever lessens, these stocks can have significant downside; just look at 50+ per cent drops in names like Zoom, Peleton, Beyond Meat or the entire Canadian pot sector after the excitement wears off and earnings need to be delivered.
Momentum strong going into year-end but the setup is reminiscent of 2017 when a year-long, uninterrupted rise in prices gave way to two sharp corrections in 2018 as interest rates began to rise. However, we are early in the new economic cycle and believe that the supply chain issues that are hurting some earnings in the short term may actually end up extending the economic cycle, since this is not a demand issue. Also, given the massive rise in global debt, we don’t see central banks doing anything more than normalizing interest rates despite short-term inflationary pressures.
Given that alternatives to stocks remain unattractive, our strategy is to stick with stocks but continue to rotate to those groups that have valuation support, high dividend yields and leverage to a slower growth economy. Industrials, autos, financials, telecom and energy infrastructure all fit that criteria. We also believe gold should do better in this environment; massively negative real interest rates, rising inflation and gold stock valuations at multi-decade lows provide a good risk-reward setup for the group, despite continued money flows into the crypto world as an alternative.
Martinrea International (MRE TSX)
Latest purchase $11.00 – Nov/2021
Stock fell after recent Q3 results, which were hurt by global chip shortage, tighter labour markets, material cost increases and their negative impact on auto production. However, we should see a significant recovery in earnings and cash flow as auto production ramps back up.
Their focus on the ‘lightweighting’ of vehicles through greater use of aluminum parts, a key factor in meeting the growing demand for electric vehicles, is helping to secure new programs. Their investment in graphene supplier NanoXplore, which gives it EV battery exposure, is worth another $2.50 per MRE share.
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.
B2Gold Corp (BTG TSX)
Latest purchase $4.80 Oct/2021
Gold stocks are trading at multi-decade low valuations and BTO stands out trading at 4 times operating cash flow, with net cash on the balance sheet, free cash flow generation and low cash costs over a well-diversified group of mining projects with a seasoned management team.
Biggest risk is that a large percentage of their assets are in politically volatile geographies such as Mali, Burkina Faso, Uzbekistan and Namibia. However, the heavily discounted valuation more than offsets those risks in our view.
Crescent Point Energy (CPG TSX)
Latest purchase $5.50 – Nov/2021
The last time oil traded in the $75 range, CPG traded in the mid-teens. Since then, new management has consolidated properties and dedicated massive free cash flows to debt reduction and increased dividends.
Valuations for the energy sector have fallen to multi-decade lows as global investment funds exit the non-renewable energy names and has created a valuation gap that should lead to more industry consolidation, stock buybacks, increased dividends and other ‘shareholder friendly’ moves, even if oil prices slip a bit.
PAST PICKS: December 29, 2020
Shaw Communications (SJR/B TSX)
- Then: $22.43
- Now: $36.96
- Return: 65%
- Total Return: 71%
CIBC (CM TSX)
- Then: $109.58
- Now: $147.10
- Return: 34%
- Total Return: 39%
Tourmaline Oil (TOU TSX)
- Then: $16.95
- Now: $43.96
- Return: 159%
- Total Return: 168%
Total Return Average: 93%
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