John Zechner, chairman and founder, J. Zechner Associates 

FOCUS: North American large-cap stocks

MARKET OUTLOOK:

Our strategy since last fall has been to hold slight underweight positions in both stocks and bonds and a higher-than-normal cash balance to take advantage of market volatility. The September selloff in stocks and bonds has provided a good opportunity to add to both. We are now slightly overweight on stocks as we believe they are already reflecting a somewhat sharp economic downturn and that valuations are now at an attractive level, particularly considering that we believe we are closer to the end of the period of tightening on interest rate policies by most central banks.

Stocks will still face some headwinds during what could be a tough third-quarter earnings period but we believe that most companies are well-positioned for an economic slowdown and will see better corporate profit performance than in prior downturns. We added to stocks in the technology, telecom, base metals and consumer discretionary sectors.

After two years of maintaining minimum exposure to bonds, we increased bond weights by about five per cent last month, drawing down cash. Long-term government bonds finally have an attractive real yield now and also provide a hedge against the possibility of a weaker-than-expected economic recession as well as the possibility that tighter monetary policy might trigger a financial event that could stoke systemic fears.

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TOP PICKS:

Paypal Holdings (PYPL NASD) 

Latest purchase US$78 – September 2022.

PayPal is a technology platform that enables digital payments that connect merchants and consumers with 426 million active accounts across more than 200 markets. Its brands include PayPal, Braintree and Venmo among others. It is a great play on electronic payment growth, generates strong free cash flow and trades at under 20 times forward earnings. Moreover, management has a renewed focus on profitability that is being supported by new activist investor Elliott Management.  A massive selloff in the high-growth sector this year has, in our view, created a great, long-term buying opportunity.

Rogers Communications (RCI.B TSX) 

Latest purchase $53 – September 2022.

Rogers has traded down sharply over the past few months due to a re-valuation of the sector in general, the costs of the one-day outage in July and worries about its ability to finance and close the planned acquisition of Shaw Communications. The fundamentals of the company continue to improve though with ROAM revenues adding to strong wireless results and bundling of phone, wireless, internet, TV and home security all helping to solidify the customer experience. Streaming also adds to the demand for its services, which have proved resilient in all economic scenarios. The stock trades at only seven times forward operating cash flow, generates strong free cash flow and continues to grow.

Walt Disney Company (DIS NYSE)  

Latest purchase US$95 – September 2022.

Disney has traded down over 50 per cent from its 2021 peak yet most of its core businesses are in better shape and benefit from the ongoing re-opening of the global economy. Parks numbers have been huge despite not being fully open yet in Europe or China. The Marvel, Pixar, Lucas Film and Fox acquisitions have all added to the industry-leading media library, which is being rolled out on Disney Plus. Disney also cross-sells its film properties to the parks, merchandise, television and games better than anyone else in the industry. While the PE valuation is at the high end of the relative range, this is solely due to the investments in the streaming business to get it up to critical mass.  The “sum of the parts” valuation is at historically low levels.