John Zechner of J. Zechner Associates.The Globe and Mail
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John Zechner believes a near-term recession is unavoidable in North America, starting in Canada and then followed by the U.S. Yet, for the chairman and lead equity manager at J. Zechner Associates Inc., that likelihood doesn’t mean it’s time to stop buying stocks.
“We believe the stock market has mostly priced in a recession already,” says Mr. Zechner, who oversees about $100-million of his firm’s $1.1-billion in assets. “We’re defensive and cautious, but this isn’t hide in the bunker time.”
His firm has been adding more defensive companies to its balanced portfolio in sectors such as telecommunications, pipelines and technology based on recent market pullbacks and increasing its U.S. bond holdings.
The firm’s balanced fund, which currently includes about 50 per cent stocks, 45 per cent bonds and 5 per cent cash, returned 9.1 per cent over the past year. Its three-year annualized return is 9.25 per cent and its five-year annualized return is 5.3 per cent. The results are based on total returns and are net of fees as of Sept. 30.
The Globe and Mail spoke with Mr. Zechner recently about what he’s been buying and selling and a big tech stock he wished he didn’t sell.
Describe your investing style.
We don’t have a particular style such as growth or value. Instead, our overall investment strategy is driven primarily by a so-called ‘top-down’ analysis, which starts with economic data and outlooks on interest rates, monetary policy, profit and margin trends and other macro data. This drives our asset allocation in stocks, bonds, cash and stock sector allocation. We primarily buy North American large-cap names based on criteria such as cash flow, profit margins, quality of management and growth.
Why do you believe a recession is inevitable?
Given the big move in interest rates, I don’t think we can avoid a recession at this point. The only question is how deep and how long it will be. In Canada, it appears we’re in a technical recession already, and the U.S. is heading down the same road. Savings rates are starting to run down, and people and companies will be rolling over mortgages and other debt at much higher rates.
How are you investing based on this outlook?
The biggest risk for stocks today is earnings expectations and the guidance for the next few quarters as economic growth slows further. The consensus on S&P 500 still expects 12 per cent profit growth in 2024 compared to this year. That seems far too optimistic, in our view. Our focus continues to be on stocks with good dividend yield support and earnings less aligned with economic cycles. For example, we’ve been adding telecom and pipeline stocks and adding to technology on recent weakness.
What have you been buying lately?
In the telecom sector, we reduced our positions earlier in the year and are now adding back. Companies we’ve been buying back are Rogers Communications Inc. RCI-B-T, BCE Inc. BCE-T and Telus Corp. T-T. These are actually infrastructure stocks and should be valued accordingly. People can’t live without the services they provide. These companies have also built out their networks effectively. Meanwhile, investors are also getting good dividend yields.
With pipelines, we’ve added TC Energy Corp. TRP-T, Pembina Pipeline Corp. PPL-T and Enbridge Inc. ENB-T. They have dividend yields of more than 6 per cent and valuations at the bottom end of their 10-year ranges. We expect that energy infrastructure will continue to be a core focus of capital allocation in the sector.
In tech, we used the recent market weakness to add to names such as Meta Platforms Inc. META-Q, Alphabet Inc. GOOG-Q and Nvidia Corp. NVDA-Q in the U.S. and Open Text Corp. OTEX-T in Canada. Interest rates aren’t likely going higher, which is a headwind for the sector. These stocks also show earnings resilience and the growth of cloud [computing] and artificial intelligence will continue.
What have you been selling?
We lightened our weighting in energy producers including Crescent Point Energy Corp. CPG-T, Cenovus Energy Inc. CVE-T and Whitecap Resource Inc. WCP-T on recent strength. The sector has had a great run, but there are longer-term headwinds. There’s a limit to the upside valuation owing to a permanent loss of some shareholder groups on increasing environmental, social and governance considerations.
We also sold some U.S. bank stocks such as Bank of America Corp. BAC-N and Citigroup Inc. C-N. While valuations are at low historical levels, we expect they will face more earnings headwinds soon as economic growth slows. That would mean higher loan-loss provisions, less capital market activity revenue, and slower loan growth on top of their massive unrealized losses on holdings of Treasury bonds.
Name one stock you wish you bought or didn’t sell, and why?
Microsoft Corp. MSFT-Q. We held the stock for more than 10 years but sold all of it earlier this year based on its valuation of more than 30 times forward earnings and some worries about a slowdown in cloud spending. The company continues to dominate the entire spectrum of software services. Over the years, it has bulked up in key areas such as social media (LinkedIn), cloud (SharePoint), AI (OpenAI) and video (Teams) to retain its dominance and growth and, in turn, its ability to retain this higher valuation.
I’ve kicked myself a bit on that one because the share price has increased since we sold it. We did well on the stock over the years but left a fair bit of money on the table. I want to buy it again at some point, but preferably at a lower price.
What advice do you have for new investors?
Do your research and stick to rational conclusions. The more you know about the investment world and the companies and industries in it, the better your investment decisions will be. There are so many good sources available to all investors. Take them all in, not just the views that align with your strategy. Listen to the contrary views as well and then compare them to your own conclusions. Try not to get caught up in fads, the current hot trade or listen to speculation without support. In the end, fundamentals do matter and eventually win out.
This interview has been edited and condensed.
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