John Zechner.Danny Yu
John Zechner is chairman and founder of J Zechner Associates. His focus is North American large caps.
Top Picks:
Torstar Corp. (TSb.TO) Last purchase $2.50 – Mar. 16
The stock has become excessively undervalued relative to its asset value due to mismanagement and a loss of investor confidence. It has a market value of $120-million but a net cash position of over $50-million, so the enterprise value is only about $70-million, less than 40-per-cent of the $200-million the company paid to buy digital media company Vertical Scope last summer. Torstar also owns the Toronto Star and Metroland newspapers, which generate positive cash flow. StarTouch app spending is winding down, and the venture should be cash neutral by end of year. The company continues to move to more digital platforms and away from ad dependence. The sale of Harlequin last year for $450-million was 40-per-cent higher than most analyst estimates and is an example of how investors are underestimating the break-up value of the total company. Negative views on management/strategy/uses of cash/newspaper industry have created a significantly undervalued stock, even assuming the dividend is cut further.
Alphabet Inc. Class C (GOOG.O)
Best combination of value and growth in the large technology universe. Alphabet remains well-positioned to benefit from the proliferation of connected devices and data management. The company controls the largest search engine and owns the most prolific mobile software operating system (Android). It is monetizing the value of its existing platform and supplementing that with timely acquisitions (i.e. YouTube) using its huge free cash flow. Its earnings multiple is in line with the overall market, but its growth potential is much higher.
Concordia Healthcare (CXR.TO) Last purchase $29.00 – Mar. 16
Concordia has gotten swept into the "Valeant vortex", seeing its stock drop as much as 70 per cent in just over a month as worries about drug pricing, roll-up acquisitions, high debt leverage and health care accounting drove valuations throughout the pharmaceutical sector lower. The acquisition of AMCo for $2.1-billion (U.S.) is fully funded, and the new assets performed well in their inaugural quarter, adding substantially to their global product portfolio, lessening their dependence on any single product and contributing substantial cash flow. Debt is high following the deal, but free cash flow is also strong and we expect the debt / EBITDA ratio to drop sharply. The company is also not dependent on product price increases to generate growth. The stock valuation is extremely attractive on a free cash flow yield and forward earnings basis. As the current panic over the sector subsides, we expect the stock to outperform the market.
Past Picks: March 9, 2015
Catamaran (CCT.TO) (Purchase by UnitedHealth closed on July 27, 2015)
Then: $60.18 Now: $80.18 +31.70% Total return: +31.70%
Detour Gold (DGC.TO)
Then: $9.51 Now: $20.46 +115.14% Total return: +115.14%
Torstar B (TSb.TO)
Then: $6.51 Now: $1.48 -77.26% Total return: -68.15%
Total Return Average: +26.23%
Market outlook:
After adding to stocks in late January, we are once again cautious in our outlook, reducing positions across the board and moving to a net short position in our hedge fund as stocks have reached the upper limit of the current trading range. While we remain wary of the global growth outlook and concerned about the continued dependence on low interest rates, the flow of funds data has been extremely negative on equities, suggesting that investors are largely out of stocks right now, which might limit the downside on stocks, despite the potential for more bad economic and earnings news.
Loan default risk in the Chinese banking system and global currency wars remain our biggest potential risks. With stocks at the top end of a two-year trading range and little impetus to push to new highs, we are once again fairly defensive in our portfolio positioning, currently underweight in stocks, overweight in preferred shares and cash and focusing on non-Canadian investments, since we see downside risk in the Canadian dollar from $0.77 (U.S.).