John Zechner, Chairman and Founder, J. Zechner Associates
FOCUS: North American major stocks
Our strategy since last fall has been to hold slightly underweight positions in both stocks and bonds and with a higher than normal cash balance to take advantage of market volatility. The September sale of stocks and bonds has offered a good opportunity to increase both. We are now slightly overweight equities as we believe they are already reflecting some of the sharp economic downturn and that valuations are now at attractive levels, especially given that we believe we are nearing the end of the period of interest rate tightening by most central banks.
Equities continue to face headwinds in what could be a difficult third-quarter earnings period, but we believe most companies are well-positioned for the economic slowdown and will see better earnings performance than in previous downturns. We increased inventories at discretion in technology, telecommunications, base metals and consumer products.
After two years of holding bond risk, we increased bond weights by about five percent last month and raised cash. The real yield on long-term government bonds is now finally attractive and they also protect against the possibility of a weaker-than-expected economic recession and the possibility that tighter monetary policy could trigger an economic event that could trigger systemic fears.
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The most popular:
Paypal Holdings (PYPL NASD)
Last purchase US$78 – September 2022.
PayPal is a technology platform that enables digital payments connecting merchants and consumers with 426 million active accounts in over 200 markets. Its brands include PayPal, Braintree and Venmo. It’s a great play for electronic payments growth, generates strong free cash flow and trades at less than 20x forward earnings. In addition, management has reinvested in profitability, supported by new activist investor Elliott Management. This year’s massive sell-off in the fast-growing sector has created a great long-term buying opportunity, in our view.
Rogers Communications (RCI.B TSX)
Last Purchase $53 – September 2022.
Rogers’ stock has fallen sharply in recent months amid a general reevaluation of the industry, the cost of a one-day shutdown in July and concerns about its ability to finance and complete its planned acquisition of Shaw Communications. The company’s fundamentals continue to improve, even as ROAM revenues drive strong wireless results and the bundling of phone, wireless, internet, TV and home security systems help strengthen the customer experience. Streaming also increases the demand for its services, which have proven to be sustainable in all economic scenarios. The stock trades at just seven times forward operating cash flow, generates strong free cash flow and continues to grow.
The Walt Disney Company (DIS NYSE)
Last purchase US$95 – September 2022.
Disney’s trading is down more than 50 percent from its 2021 peak, but most of its core businesses are in better shape and benefiting from the ongoing reopening of the global economy. The parks have been huge, although they are not yet fully open in Europe or China. Acquisitions from Marvel, Pixar, Lucas Films and Fox have all added to the industry-leading library of media released on Disney Plus. Disney also cross-sells its movie properties to parks, merchandise, television and games better than anyone else in the industry. Although the PE valuation is at the high end of the relative range, this is solely due to the investment in the streaming business to reach critical mass. The “sum of the parts” value is historically low.
MORE CHOICES: 4 October 2021
North American Construction (NOA TSX)
- Then: $18.79
- Now: $14.90
- Return: -21%
- Total return: -19%
Martinrea International (MRE TSX)
- Then: $11.46
- Now: $8.78
- Return: -23%
- Total return: -22%
Alphabet (GOOG NASD)
- Then: $2,675.30
- Now: $103.79 (after 7/15/2022 20-share split)
- Return: -22%
- Total return: -22%
Average total return: -21%
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