John Zechner, chairman and founder of J. Zechner Associates 
Focus: North American large caps
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MARKET OUTLOOK

Stocks have rallied to new highs on optimism that the Trump presidency will lead to higher U.S. and global growth, reduced regulations, higher infrastructure spending and drastically reduced taxes. Though they have thus far failed to deliver on those promises, investors have given them the benefit of the doubt and continue to push stocks higher. 

Stronger economic growth in Europe and Japan have also supported that bullishness. But we remain skeptical on the outlook for stocks as valuations remain high, and as interest rates rise we expect earnings growth to slow down. The bottom line is that the risk/reward ratio for stocks is unfavourable in our view and we continue to structure our managed funds accordingly. While we don’t want to infer that ‘the sky is falling’ in terms of financial markets, we can’t help but be aware of the risks that have been created by an extended period of excessively low global interest rates. Money has flowed to the riskiest assets and investors have become complacent about the risk that this entails, not unlike the way funds flowed excessively to the U.S. housing market from 2003-2007 and then into commodities from 2008-2011. In both cases, the markets collapsed once the funds flow started to reverse. 

Central banks are now in the process of unwinding the massive pools of liquidity that have fueled the bull market in financial assets. While global economic growth has surpassed our expectations this year and the optimism around the potential ‘Trump Agenda’ has fueled more optimism about better U.S. growth, we are very late in the economic cycle and capacity is getting strained in many sectors, including the labour market.   Rising wages will keep the U.S. Fed tightening monetary conditions. While no one can accurately predict the timing of any such event, we have to believe that the risks are higher for stocks than they have been since 2011, when we had our last significant market correction.

TOP PICKS

TRINIDAD DRILLING (TDG.TO) - last purchased at $1.60, Aug. 2017.
Don’t have to be an energy bull to like Trinidad here. While rig count has been flat recently, they have been shifting rigs to U.S. (Permian Basin) from Canada and making ‘tuck-in’ acquisitions to round out/expand product offering. All of this should improve margins and growth. Also still has joint venture with Haliburton for foreign drilling rigs. Rising free cash flow has been used to reduce debt to a much more manageable level. Best reason though is that the stock is trading at about 35 per cent of the replacement value of their assets which, in the past, has always been the low point for energy services companies. 

ALPHABET 'C' SHARES (GOOG.O) - last purchased at US$920, Aug. 2017.
Remains the top choice in large cap technology as they dominate in key growth areas. The company is producing impressive financial performance, with growth accelerating versus previous quarters. GOOGL saw improved and strengthening prospects from mobile and YouTube advertising, as well as increased traction in the company’s cloud business. On top of this they own the (not yet monetized) Android operating system which supports over 60 per cent of global wireless devices. Alphabet also has other growth initiatives underway ranging from Nest and the Pixel smartphone, to the company’s autonomous vehicle unit Waymo. The fundamentals behind the numbers remain as strong as ever from a qualitative perspective. Valuation is fairly reasonable and still offers attractive upside potential at current prices.

HUDSON'S BAY COMPANY (HBC.TO) - last purchased at $11.70, Nov. 2017.
Despite the weak results and industry difficulties overall for old-line retail, particularly department stores, we find the discount of the stock price from the potential value of the real estate assets of the firm as too attractive to ignore. While the high debt, operating losses and competition from online retailers remain the largest risks, the recent sales of some core properties demonstrate the ability of the company to realize returns that are far in excess of their value as retail operations. Potential sale of Germany’s Kaufhoff as well as key locations in New York could quickly demonstrate the upside. Meanwhile, the rising tide of shareholder revolt against the ‘mostly real-estate oriented’ management team should accelerate the timeline for the realization of these values or push management to take the company private again.

PAST PICKS: NOVEMBER 16, 2016

*SHORT* CATERPILLAR (CAT.N)

• Then: $93.35
• Now: $137.74
• Return: -47.55%
• Total return: -51.96% (if shorted until today)

MARTINREA INTERNATIONAL (MRE.TO)

• Then: $7.02
• Now: $13.01
• Return: 85.32%
• Total return: 87.56%

DHX MEDIA (DHXb.TO)

• Then: $6.99
• Now: $4.01
• Return: -42.63%
• Total return: -41.86%

TOTAL RETURN AVERAGE: -2.08%