John Zechner, President and Founder of J. Zechner Associates
Focus: Large stocks in North America
In July, growth stocks drove the Nasdaq up 12 percent, cyclical stocks slowed, gold rose nearly $100, and 10-year bond yields fell nearly a full point from their mid-June peak. Rightly or wrongly, markets have been persuaded by the idea that growth is slowing and the US Federal Reserve is closer to “finishing” with higher interest rates.
We think it’s too early to start setting prices at the end of the price-raising cycle. We still have a long way to go before we see a reversal in Fed policy like we saw at the end of 2018 after stocks fell more than 20 percent. Central banks are just beginning to tighten while inflationary expectations are becoming somewhat ‘entrenched’. While experts may debate whether or not the US is in recession after two consecutive quarters of negative growth, the reality is that economic growth is slowing. This means that inflation has peaked during the cycle, but returning to the 2 percent target will take longer than expected, even with the recent drop in prices for many basic commodities.
In the meantime, the slowdown means earnings estimates have to come down even more. Despite these headwinds for growth and earnings, we maintain a neutral weight in the stocks. Valuations have shrunk sharply since the beginning of the year and many sectors (ie consumer discretion) are already reflecting recessionary conditions. More importantly, investors are taking a completely bearish stance, which will limit the downside in stocks from here. Bank of America monthly fund manager survey global growth and earnings expectations fell to their lowest levels ever, while expectations of a recession were at their highest since May 2020. Investors’ allocation to stocks fell to levels last seen in October 2008, while exposure to liquidity rose to Highest level since 2001. Net short position in US stock futures is around $60 billion while total short position is at an all-time high of $370 billion. Such levels can be seen around market lows.
In the past month, we have added to positions in core US technology stocks including Alphabet, Microsoft, Qualcomm, Paypal, and AMD; Also in GM, FedEx, Magna, BRP, Air Canada and the US (Citi, Amex and JP Morgan) due to a weak first half. Additionally, we see opportunities in the energy space, with shares down more than 20 percent in the June-July period despite trading at record low valuations. But the forces that keep energy prices high persist, whether or not there is a recession. Major names in the oil sector we have added include Crescent Point, Whitecap Resources and Cenovus as well as natural gas producer Arc Resources.
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Alphabet (GOOG NASD)
Last Purchase of $105 – June 2022
Alphabet continues to stand out as the best combination of growth and valuation in the technology sector. While the dominant positions in online search and advertising drive the narrative, the company is also a major player in cloud services as well as being highly valued in non-profit assets such as the Android operating system for wireless devices, YouTube and Waymo (automated driving). Advertising markets have slowed in the short term but the low valuation offsets this risk.
General Motors (GM NYSE)
Last Purchase Date $31 – Jun 2022
If Tesla can get a market cap close to $1 trillion, GM should be worth more than $56 billion. Especially considering that it produces more than six times as many cars annually. GM plans to double revenue to about $300 billion by 2030, including $90 billion in electric vehicle sales. GM also owns a controlling stake in Cruise, a major self-driving player that plans to roll out automated taxis. The company can fund this growth from its old combustion engine business, yet still trade at a multiple of much less than the market as a whole. Investors are skeptical about GM’s ability to manage the electric-vehicle transition and achieve those goals, but the stock already discounts much of the skepticism.
Agnico Eagle Mines (AEM TSX)
Last $50 Purchase – July 2022
Gold stocks have fallen dramatically over the past year as a stronger US dollar and higher interest rates have pushed gold down from record lows. Meanwhile, valuations in the sector have fallen to multi-decade lows, with most names trading at five times cash flow and net asset value discounts, well below historical levels. Agnico remains a “go-to” name in the sector for its large corporate exposure, low political risk (the bulk of assets are in Canada, the US and Australia) and growth from its recent merger with Kirkland Lake Gold (which, in turn, has acquired) the transformation of Lake Gold. gold last year).
Previous Picks: Aug 23, 2021
Martinria International (MRE TSX)
- Then: $12.08
- Now: $9.60
- Yield: -21%
- Total Return: -19%
MDA Ltd. (MDA TSX)
- Then: $15.98
- Now: $8.83
- Return: -45%
- Total return: -45%
Arc Resources (ARX TSX)
- Then: $7.99
- Now: $17.07
- Yield: 114%
- Total Return: 120%
Average total return: 19%