John Zechner, Chairman & Founder, J Zechner Associates
Focus: North American Large Caps
Top picks: Torex Gold, Shopify, MDA Space
MARKET OUTLOOK:
Stocks have had tremendous run off the April lows, but we still expect weakening economic conditions for the balance of the year, which should give a lift to bonds as interest rates fall and put some of the stock market gains achieved so far this year at risk. For those reasons we continue to be slightly underweight stocks and overweight bonds.
Recent soft employment numbers in the U.S., weak growth in Canada and a dismal report from last week’s Beige Book all suggest that the tariff and trade uncertainty is stopping companies from making capital investments and/or adding to employment rolls, which will have carryover impacts on consumer spending.
We don’t believe that the recent broadening of the stock market rally is sustainable since profit growth outside of the tech sector is running below a five per cent annual rate while stock market valuations are at record highs and investor sentiment has gone ragingly bullish.
While keeping most of our names in the tech sector (Nvidia, Alphabet, Amazon, Shopify, and Salesforce) we have reduced the weights of each of those names. We also reduced bank stocks on recent gains due to valuation and growth concerns.
Our top sectors are interest sensitive ones such as telecom, pipelines, utilities, and some consumer staples. We also continue to have about an eight per cent weight in the gold sector.
- Market-moving news, fast: Get the BNN Bloomberg App now
- Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
TOP PICKS:
Torex Gold (TXG TSX)
While we remain bullish on gold stocks overall, we note that Torex has traded at a significant discount to the rest of the sector due the winding down of production at their largest mine, the El Limon open pit on their Morales property in Mexico, which we view as a relatively safe geo-political risk region. However, in the past year they have also almost seamlessly migrated that production to the Media Luna deposit at the south end of the same property.
Meanwhile they have expanded the reserves at El Limon by going underground at that mine with a higher grade that will also yield about 30 per cent copper output. Overall mine life has expanded to the mid 2030s, and the company is once again on the verge of generating free cash flow and yet continues to trade at a discount to the group on both a net asset and cash flow basis.
Shopify (SHOP TSX)
The stock is now the largest single weight on the TSX Index yet is the most under-owned by institutional investors due to valuation concerns. While the stock does trade at over 10 times revenue, it is also increasing gross margins and starting to generate significant free cash flow as it reaches scale. This should lead to accelerated earnings growth over the next few years in addition to the recent upgrade in their revenue growth rate to the mid 20 per cent range.
The company continues to dominate the market for small and mid-sized companies to achieve and manage the online portion of their business. While the history of companies becoming the largest stocks of the TSX is checkered (Nortel, Blackberry, Valeant) we don’t see Shopify going down that same road.
MDA Space (MDA TSX)
The sell-off in the stock this week on the EchoStar contract cancellation is providing longer-term investor a great chance to enter the name as it continues to be one of the ‘arms dealers of the space race’ with its varied offerings of products and its overall strength in building components for and managing launching LEO (Low Earth Orbit) satellite constellations.
While the stock is no longer an unknown name, it still trades at a significant discount to industry comparable despite having a strong backlog, including lead contractor on the US$2.1 billion Telesat Lightspeed constellation and the Globalstar to be the prime contractor for the satellite operator’s next generation low earth orbit (LEO) constellation, with a total contract value of approximately US$1.1 billion.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| TXG TSX | Y | Y | Y |
| SHOP TSX | Y | Y | Y |
| MDA TSX | Y | Y | Y |
PAST PICKS: SEPTEMBER 9, 2024
Veren (VRN TSX) - Acquired by Whitecap Resources May 12, 2025
Then: $8.68
Now: $9.11
Return: 5%
Total Return: 8%
Lightspeed (LSPD TSX)
Then: $22.18
Now: $16.77
Return: -24%
Total Return: -24%
Atkinsrealis (ATRL TSX)
Then: $55.72
Now: $93.14
Return: 67%
Total Return: 67%
Total Return Average: 17%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| LSPD TSX | Y | Y | Y |
| ATRL TSX | Y | Y | Y |
