Oct 12, 2016

John Zechner's Top Picks: October 12, 2016

BNN Bloomberg

John Zechner , BNN

John Zechner, chairman and founder of J. Zechner Associates
Focus: North American large caps
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MARKET OUTLOOK
Global economic growth remains weak, profit margins have peaked for this cycle and input costs, most noticeably wages, are starting to rise again. Yet stocks are trading near all-time highs and valuations remain at the high end of all historical measures, supported almost completely by the zero/negative interest rate policies of global central banks. Those policies, however, are losing their impact and the marginal benefit of further easing is minimal, while the risks associated with this ongoing support continue to rise. The bottom line for us is that the stock market rally has run its course and that stocks face more headwinds in the months ahead from the risks mentioned as well as upcoming U.S. elections. We remain with an underweight position in stocks after selling holdings in the gold and base metals sectors. We remain overweight on U.S. stocks given that we expect further weakness in the Canadian dollar and have a higher comfort level with the valuation of U.S. banking, technology and transportation stocks. We also still have an overweight position in Canadian preferred shares given their yields of over five per cent and the increasing institutional interest in this sector as a source of income.

JOHN ZECHNER’S CATALYSTS (DRIVERS) TO WATCH

Third-quarter earnings reports
Global industrial production data
Chinese currency/capital flows/banking system
ECB/Fed monetary policy updates/changes
U.S. election results

TOP PICKS

DHX MEDIA (DHXb.TO) – Last purchase $6.40
World’s leading independent, pure-play kids’ content company and animation house. DHX trades at an Enterprise Value/EBITDA multiple of under 10 times, a significant discount to industry comps and recent transactions such as DreamWorks. Benefitting from the migration to digital platforms; 85 per cent of their distribution revenue comes from digital sources. Also has Global distribution to 300+ broadcasters and streaming services worldwide including their Family suite of channels in Canada and a growing roster of high-profile brands to drive increasing merchandising revenue. They also recently added WildBrain, a multi-platform kids network that leverages global expertise, a large content library and scale to create new distribution and revenue for both DHX and other family brands. We see the stock as a Canadian ‘mini-Disney’ as it develops kids content and then cross-markets it through a growing array of distribution channels.

ALPHABET INC (GOOGL.O) – Last purchase US$700
Best combination of value and growth in large technology universe. Remains well positioned to benefit from proliferation of connected devices and data management, which also allows the company greater access to consumer behavior info and apply that to sales patterns. Controls largest search engine and owns the most prolific mobile software operating system (Android). Monetizing the value of its existing platform including the smartphone market with recent move into hardware with Pixel. Also supplementing with timely acquisitions (i.e. YouTube) from huge free cash flow. Earnings multiple in line with the overall market but growth potential much higher.

TWITTER (TWTR.N) – Last purchase US$17.80
The company is worth more to some other large players in social media/software (i.e. Salesforce, Facebook, Google, Apple, Disney) in much the same way as the MSFT/LNKD deal is good for both companies as it would add a new growth leg to the buyer with an asset that is under-utilized. Also expect that the U.S. election and the NFL live video deal should add net users and result in better third-quarter results. Mobile revenue also starting to improve and there is still upside from improving their advertising revenues. Including cash on balance sheet, the stock is trading at about 14 times EV/EBITDA and we would expect any deal to take place in excess of 20 times.