John Zechner, chairman and founder of J. Zechner Associates
FOCUS: North American large caps
Top Picks: Baytex Energy, Meta Platforms, BCE
MARKET OUTLOOK:
We see stock risks as balanced but economic risks are to the downside as U.S. growth slows in line with ongoing weakness across the globe in continued reaction to interest rate hikes in 2022-23. Don’t expect the U.S. Federal Reserve to move on interest rates prior to its September meeting but, with short-term rates more than 200 basis points above neutral level, there’s lots of room for a 50-basis point move in September as the Fed would “front load” the easing cycle.
The recent sell-off was more pronounced due to the aggressive positioning and sentiment going into this month as investors were “all in.” The Market Vane Bullish consensus was 72 per cent, Investors Intelligence survey was 63.6 per cent bullish and the bear share at 16.7 per cent bearish, a bull/bear spread beyond extreme levels. The retail investor AAII poll at 52.7 per cent bullish, was well over double the 23.4 per cent bearish reading. Actual investor positioning was even more extreme with the household sector financial mix over 70 per cent in equities, taking out the peaks in both 2000 and 2007.The panic selling last week may have taken some of those sentiment readings down, but we still see the risk of further selling to reduce stock weights back towards normal levels.
In terms of strategy adjustments in this sell-off, we had taken some profits in some of the high-profile names in the technology sector, including chip stocks AMD, Nvidia, Amazon and Meta but were buying back many of those same stocks on sharp sell-off. Big Tech is still OK but winners need to demonstrate growing AI exposure and a path to profitability in AI. Meta, Microsoft, Alphabet and Amazon have shown best results in that regard. Semi stocks will continue to show growth as AI/data centre buildout continues. Micron is a new name added on weakness as the stock fell over 40 per cent.
With our admitted weak economic outlook and belief that the path of interest rates over at least the next two years will be downward, we are not particularly positive on mid and long-term government bonds nor the corporate bond sector. While we do expect central banks across the globe, but particularly in North America, to be cutting short-term interest rates aggressively, we don’t believe that same reduction will take place in the longer end of the yield curve. In fact, we expect that long-term rates will only drop marginally or might even stay at current levels while short-term interest rates fall as much as 200 basis points, which will “normalize” the yield curve. The primary reason for this is the massive government borrowing required, particularly in the U.S., to fund the ongoing record levels of government debt.
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Baytex Energy (BTE TSX)
The stock trades at an overall bargain valuation and a discount to the energy group as they are still wrongly viewed as an over-levered play on heavy oil. The company has re-oriented its production to light oil in the highly profitable Duvernay and Eagle Ford regions while leveraging their heavy oil expertise in the Peace River and Peavine (Clearwater) regions. It has meaningfully reduced debt and increased shareholder returns, through re-instated dividends but primarily via stock buybacks, which will pick up substantially in the back half of 2024.
Meta Platforms (META NASD)
Meta Platforms builds technology that helps people connect and share, find communities, and grow businesses. The company’s products enable people to connect and share with friends and family through mobile devices, personal computers and devices.It operates through two segments: Family of Apps (FoA) and Reality Labs (RL).The stock has rallied sharply in the past 18 months but still trades below a market multiple.Meta is one of the best ways to participate in the monetization of AI services as its mobile advertising business is one of the best-targeted methods of reaching customers and has driven tremendous growth while apps will allow it to effectively bundle AI products for customers.
BCE (BCE TSX)
BNN Bloomberg is owned by Bell Media, which is a division of BCE.
BCE, along with the rest of the telecom sector and other high dividend yield sectors, has seriously lagged the overall market move since the beginning of the interest rate increase cycle in 2022. Telecom stocks had the additional negative due to the addition of a legitimate fourth player in the wireless sector and the worries about an impending price war and less subscriber growth due to more limited immigration growth. BCE has suffered the most due to its lower free cash flow generation as it continues to spend on network upgrades. We see limited downside in valuation and expect the nine per cent dividend yield to add further support. Meanwhile, cash flows should continue to grow as traffic volumes expand on both higher streaming activity and the implementation of large language models for AI. Finally, the telecom industry should be a huge beneficiary of the cost reductions available from wide-scale AI implementation as they communicate more efficiently with their customers.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| BTE TSX | Y | Y | Y |
| META NASD | Y | Y | Y |
| BCE TSX | Y | Y | Y |
Rogers Communications (RCI.B TSX)
- Then: $53.24
- Now: $54.44
- Return:2%
- Total Return: 6%
Pembina Pipeline (PPL TSX)
- Then: $41.01
- Now: $52.09
- Return:27%
- Total Return: 35%
BRP (DOO TSX)
- Then: $105.41
- Now: $91.09
- Return:-13%
- Total Return: -13%
Total Return Average: 9%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| RCI.B TSX | Y | Y | Y |
| PPL TSX | Y | Y | Y |
| DOO TSX | N | N | N |
