John Zechner, chairman and founder of J. Zechner Associates
FOCUS: North American large caps
Top Picks: AtkinsRealis Group, Pfizer, Meta Platforms
MARKET OUTLOOK:
With sentiment running so high at the same time as valuations are at record highs and the tailwind of falling interest rates possibly put on hold, we see no benefit in increasing the risk levels in client portfolios by taking stock weightings higher. This is particularly the case in the more economic sensitive sectors that have already rallied sharply without a supporting increase in earnings projections. We are retaining relatively high cash levels in portfolios, where we are still seeing positive real rates of return on short-term paper.
We are slowly starting to add to longer-term U.S. bond exposure as yields push up into the 4.5 per cent range. In the stock market we still like the high yield group with overweight positions in telecom, electric utility, energy and pipeline stocks. We have reduced bank stocks in both the U.S. and Canada on the recent strength and will re-evaluate once we see the upcoming fourth quarter earnings reports from the Canadian banks.
We continue to have healthy weight in the technology sector with an ongoing focus on the large hyper-scalers and other software names as well as Celestica in the equipment group.
But we have reduced our weights in the semiconductor space, with memory chip maker Micron being our remaining holding. With year end tax loss selling mostly out of the way by now, December does have a history of being one of the stronger months of the year for stocks, so it would not surprise us to see this “post-election euphoric” rally continue.
But the overall risk-reward profile in the stock market looks unfavourable, so we continue to have a slightly underweight position in stocks with a focus on defensive, high-yield sectors and a healthy allocation to cash and short-term paper.
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TOP PICKS:
Atkinsrealis Group (ATRL TSX)
The former SNC-Lavalin Group Inc. is a professional service, and project management company. It delivers end-to-end services across the whole life cycle of an asset including consulting, and advisory and environmental services. ATRL’s core engineering services regions and nuclear segments are well positioned to continue realizing strong organic revenue growth and margin expansion. Top line growth is supported by robust backlogs and favorable demand trends, while management is focused on driving margin improvement in engineering services (around 75 per cent of TTM revenue). Nuclear segment is underappreciated in the current valuation and could see potential life extension of the Pickering reactors. Risks as always include possible cost overruns and/or cash outflows associated with LSTK Projects work, a weakening of end-market conditions or failure to deliver improved margins. But the valuation is attractive at 10.7 times and 8.8 times 2024/2025 adjusted EBITDA, a discount compared to Canadian engineering services peers.
Pfizer (PFE NYSE)
Pfizer stock has fallen more than 60 per cent from its 2022 high due to the fall-off in COVID-19 vaccines as well as the recent appointments of health industry leaders by the incoming U.S. administration that are viewed as “unfriendly” to the pharmaceutical industry. But the sell-off has created opportunity as the company has done a great job of using the “windfall” COVID-19 vaccine revenues to add to its pipeline of growth, including promising diabetes and oncology drugs. There has also been activist investor interest in the company which could jumpstart shareholder friendly moves. The stock has a dividend yield of over six per cent, trades around 10 times forward expected earnings and should have annual earnings growth of over 12 per cent over the next five years. This should give it downside valuation and dividend support as well as the potential for re-valuation due to a more favourable growth outlook.
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 the perversity and penetration of its apps will allow them to effectively bundle AI products for its customers. Also, its mobile advertising business is one of the best targeted methods of reaching customers and improving productivity.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ATRL NYSE | Y | Y | Y |
| PFE NYSE | Y | Y | Y |
| META NASD | Y | Y | Y |
PAST PICKS: NOVEMBER 7, 2023
PayPal Holdings (PYPL NASD)
- Then: US$54.63
- Now:US$86.62
- Return: 59%
- Total Return: 59%
Pembina Pipeline (PPL TSX)
- Then: $43.89
- Now: $56.87
- Return: 30%
- Total Return: 37%
Martinrea International (MRE TSX)
- Then: $12.38
- Now: $10.15
- Return: -18%
- Total Return: -17%
Total Return Average: 26%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PYPL NASD | N | N | N |
| PPL TSX | Y | Y | Y |
| MRE TSX | Y | Y | Y |