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

MARKET OUTLOOK

With extended valuations and the narrowing breadth of the overall advance we have started making some adjustments to our strategy to mitigate downside risks from the high growth sectors. We are now getting exposure to some of the laggards that should play a bit of ‘catch up’. The bottom line is that we think we pushed the envelope on the growth/low interest trade and have made some shifts into value stocks, taking profits on a large portion of our technology and utility positions and reduced bond exposure. On the other side, we’ve added some cyclical exposures (Nutrien, Teck Resources, Martinrea, Tourmaline Energy, BMO, Manulife and CIBC). In the U.S., we maintain holdings in the semi-conductor stocks and added some financials (Citi, Bank of America) as well as industrials like 3M. We still expect gold to do well over the next few years as real interest rates will stay low, the U.S. dollar continues to weaken and inflation is actually starting to rise. We have reduced our gold positions a bit, though, as we are concerned that they have run too far, too fast and could see a pullback in the short term. We still have about a 5-6 per cent position in the sector and would add to that on any pronounced weakness, as we see this upward move in precious metals as a longer-term move. We remain cautious on outlook for economic growth and corporate profits. We see only minimal returns in bonds and cash and therefore continue to be overweight in the stocks, though concentrated in very defensive sectors with low valuations and high dividend yields. Core overweight positions still include the pipeline, telecom and utilities sectors, where we see dividend yields of 6 per cent or more and valuations of less than ten times operating cash flows. This compares very well to the more expensive high growth sectors without the risk associated with more cyclical sectors. We again added slightly to preferred shares as well, particularly those with strong credit ratings and little risk of lower rate resets.

TOP PICKS

Shaw Communications (SJR/B TSX) - Last purchase: $19.00 March 2020 

In the current slower growth environment, the telecom sector provides the best risk-reward combination for investors with low volatility, free cash flow generation and strong dividend growth.  Less appreciated are the benefits of owning all the long-life spectrum and communications infrastructure assets, at a significant discount to other long-term capital assets. Shaw trades below 6 times EV/EBITDA, generates significant free cash flow and has paid down acquisition debts. Recent results beat expectations as the growth of Shaw/Freedom wireless looks better than the incumbents and they have a relatively stronger balance sheet with lower expected spectrum cost. COVID-19 impacts (store closures and subdued subscriber activity) have been managed well and broadband trends are improving with the growth of 5G and streaming expected to increase further.

Martinrea International (MRE TSX) - Last purchase:  $6.50, March 2020.

This stock has multiple attractions including an exceptionally low valuation but some earnings cyclicality that will allow it to outperform strongly once we start to get an actual recovery in place. Martinrea has a strong balance sheet and cash flow that has withstood the steep downturn in auto sales over the past two quarters and is now positioned to participate in the recovery of the sector. The heavily discounted valuation on a quality business provides an opportunity much like it did at market lows in 2009 and 2016. We also are more upbeat about a ‘post-crisis’ recovery in the auto sector as we see a continued avoidance of air travel, a pent-up need to do some driving and low gas prices as all leading to a sharp rebound in miles travelled in North America. This, in turn, has always been highly correlated to stronger auto sales.

Blackberry (BB TSX) - Last purchase: $5.00, April, 2020.

The company under John Chen has achieved a phenomenal turnaround from a fading maker of smartphones to a pure software firm with competitive strength in cyber security and auto IoT software.  The company has maintained positive cash flow with a strong balance sheet and is now showing double-digit revenue growth in their core competencies. However the stock is trading near multi-year lows despite a favourable valuation on revenue, with a slide of over 50 per cent in the past two years while most other tech stocks, particularly in software and security, have rallied. While the company has been hurt by near-term execution issues and weakness in QNX due to auto production delays, investors are overlooking some key assets, such as Cylance, QNX, and Athoc, as well as the long term growth in cyber security.
 

PAST PICKS: October 18, 2019

Maxar Technologies (MAXR TSX) 

• Then: $10.10
• Now: $31.75
• Return: 214%
• Total Return: 215%

Rogers Communications (RCI/B TSX)

• Then: $65.28
• Now: $56.40
• Return: -14%
• Total Return: -11%

Crescent Point Energy (CPG TSX)

• Then: $4.98
• Now: $2.18
• Return: -56%
• Total Return: -56%

Total Return Average: 48%