John Zechner.Danny Yu
John Zechner is chairman and founder, J. Zechner Associates. His focus is American large caps.
Top Picks:
DHX Media (DHX.B-T)
Last purchased @ $6.40
DHX is the world's leading independent, pure-play kids' content company and animation house. DHX trades at an enterprise value/EBITDA multiple of under 10x, a significant discount to industry comps and recent transactions such as Dreamworks. The company benefits from migration to digital platforms, as 85 per cent of their distribution revenue comes from digital sources. DHX also has global distribution to 300-plus 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 stocks as a Canadian 'mini-Disney' as it develops kids content and then cross-markets it through a growing array of distribution channels.
Alphabet Inc (GOOG-Q)
Last purchased @ $700 (U.S.)
Alphabet offers the best combination of value and growth in the large technology universe. It remains well-positioned to benefit from the proliferation of connected devices and data management, which also allows the company greater access to consumer behavior info and applies that to sales patterns. It controls the largest search engine and owns the most prolific mobile software operating system (Android). Alphabet is monetizing the value of its existing platform, including the smartphone market, with a recent move into hardware with Pixel. It's also supplementing that with timely acquisitions (i.e. YouTube) from a huge free cash flow. Its earnings multiple is in line with the overall market, but its growth potential is much higher.
Twitter (TWTR-N)
Last purchased @ $17.80 (U.S.)
The company is worth more to some other large player in social media/software (i.e. Salesforce, Facebook, Google, Apple, Disney) in much the same way as the Microsoft / LinkedIn deal is good for both companies, as it would add a new growth leg to the buyer with an asset that is under-utilized. Expect that the U.S. election and the NFL live video deal should add users, which should lead to better third-quarter results. Mobile revenue is also starting to improve, and there is still upside from improving their advertising revenues. Including cash on the balance sheet, the stock is trading at about 14x EV/EBITDA, and we would expect any deal to take place in excess of 20x.
Past Picks: Friday Oct. 9, 2015
Hudson's Bay Co (HBC-T)
Then: $24.96 Now: $16.90 32.29% Total return: -31.49%
Apple (AAPL-Q)
Then: $112.12 Now: $117.52 +4.82% Total return: +7.05%
Martinrea International Inc (MRE-T)
Then: $11.35 Now: $8.36 -26.34% Total return: -25.38%
Total Return Average: -16.61%
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 the upcoming U.S. election. We remain with an underweight position in stocks after selling holdings in the gold and base metal sectors. We remain overweight in 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 5 per cent and the increasing institutional interest in this sector as a source of income.