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

MARKET OUTLOOK

We expect economic growth to continue to decelerate globally and profit estimates will have to be reduced further. Given slowing growth and higher valuations, we see the risk/reward trade-off as being unfavourable for stocks, but we can’t ignore the strong positive money flows in many of the large-cap and growth sectors due to asset re-allocations and the continued trend towards passive investments. Both factors are supporting a move to major stock indexes. The return to record-low interest rates continues to support somewhat higher stock valuations, particularly for the defensive sectors of the market such as utilities, telecom and communications services.

We continue to have overweight positions in mid-term bonds, preferred shares and cash, but did add back some positions in moderately-valued U.S. stocks such as Boeing, 3M, IBM and FedEx. While slowing global growth will continue to weigh on the cyclical sectors of the market, we do expect to see a peaking in the value of the U.S. dollar due to continued massive borrowing needs and slowing growth. This could help to form a bottom for many of the commodity sector as it has done for gold stocks. We increased our exposure to some cyclical/resource stocks in Canada, particularly energy, where valuations have touched all-time lows as we continue to watch a mass exodus of capital. These conditions are what ultimately create bottoms for stocks. We remain cautious on the financial sector due to continued downward pressure on interest rate margins and minimal loan growth. With preferred share yields now over 6 per cent and all of our holdings in extremely safe utility, pipeline and other investment-grade holdings, we still see the risk/reward as very favourable. We also continue to “high-grade” the stock holdings in the portfolio due to overall market risk and the need for liquidity, adding to defensive, reasonably-priced names in the “recession-resistant” telecom sector such as Rogers, Telus and BCE.

TOP PICKS

MAXAR TECHNOLOGIES (MAXR:CT)
Latest purchase at $8 in June 2019.

Maxar Technologies is an integrated space and geospatial intelligence company with a full range of space technology solutions for commercial and government customers including satellites, Earth imagery, geospatial data and analytics. Its customers include global satellite operators, government and corporate clients. The 2017 acquisition of Digital Globe has allowed the old MacDonald Dettwiler to merge its satellite and space hardware manufacturing with Digital Globe’s software and analytic capabilities, a potent and attractive offering for companies and governments looking for imaging data for marketing, defence or analysis. The addition of debt to make the acquisition and the need to finish building out the low-level satellite orbit has disappointed investors who were looking for a quicker paydown of the debt. While that presents some risk, the valuation of the stock has fallen to exceptionally low levels such that any success paying down debt and resuming growth should lead to sharp gains in the stock price.

CRESCENT POINT ENERGY (CPG:CT)
Latest purchase at $4 in August 2019.

Crescent Point’s new management is now focused on consolidating production areas and reducing financial leverage dramatically as it generates significant free cash flow at current strip prices that it’s using to pay down debt, which should fall to less than two times cash flow by year-end. The company has also enacted an aggressive program to buy back stock, which should help valuation since the company has had a traditional reputation for issuing far too much equity to fund growth. With the stock trading at a discount to net asset value and only about three times debt-adjusted operating cash flow, we see further upside in the stock.

ROGERS COMMUNICATIONS (RCI/B:CT)
Latest purchase at $64 in September 2019.

In a slowing growth environment we think the telecom sector provides safety, 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. Rogers trades at under eight times EV/EBITDA and generates significant free cash flow. Unlimited data plans and other pricing pressures will reduce the average revenue per user, but the growth of 5G and streaming will also increase usage dramatically.

PAST PICKS: DEC. 28, 2018

URANIUM PARTICIPATION CORP (U:CT)

• Then: $4.42
• Now: $4.17
• Return: -6%
• Total return: -6%

MAXAR TECHNOLOGIES (MAXR:CT)

• Then: $16.07
• Now: $10.10
• Return: -37%
• Total return: -37%

FEDEX (FDX:UN)

• Then: $158.98
• Now: $149.91
• Return: -6%
• Total return: -5%

 Total return average: -16%

TWITTER: @jzechner56

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