John Zechner.The Globe and Mail
John Zechner has seen his share of market downturns in his nearly 40 years managing money. It’s that experience that gives him the confidence to recommend investors “stay calm” during the latest market rout – and start buying if they have the stomach for more volatility.
“We’ve seen buying opportunities like this before, where stocks seem to discount the absolute worst-case scenario and, in the end, what we’ve ended up with are some pretty good buying opportunities,” says Mr. Zechner, chairman and lead equity manager at J. Zechner Associates, which oversees more than $1-billion in assets.
“It’s not like we don’t have some bad news in front of us,” adds Mr. Zechner, citing the trajectory of rising interest rates that threaten to push the U.S. and Canadian economies into a recession. Still, he says he believes the market has already priced in at least a moderate economic downturn and investors are pessimistic – a sentiment that has been associated with market bottoms in the past.
“We also don’t see the same type of excesses as in past economic downturns and therefore believe any recession will be short and shallow,” he says, adding that the job market is still strong, corporate balance sheets are in good shape and inventories of most major consumer goods are low by historical standards.
“Bottom line, the risk-reward trade-off in stocks has improved dramatically since the beginning of the year despite higher interest rates and increased economic risks.”
Investors in his firm’s Canadian balanced fund have been well positioned for the recent market swings. The fund, which includes about 50 per cent equities, 35 per cent bonds, 5 per cent preferred shares and 10 per cent cash, has seen total returns of 5.3 per cent over the past year, as of June 30, and an annualized return of 6 per cent over the past three years. The fund’s mix compares with an allocation of about 45 per cent equities, 35 per cent bonds, 5 per cent preferreds and 15 per cent cash at the start of this year.
The Globe and Mail recently spoke to Mr. Zechner about what he’s been buying and selling, and the smart stock tip he gave to his barber a few years back.
Describe your investing style.
Our core equity investment style has always been “top down” growth, meaning we first look at macro variables such as economic growth, profits and interest-rate trends before focusing on sector weights and individual stock picks. In terms of stock selection, we have a bias toward GARP (growth at a reasonable price) but will also add cyclical exposure such as energy, metals and industrials, depending on our outlook.
What have you been buying or adding in recent months?
We expect to see a peak in inflation soon and probably less “hawkish” behaviour from central banks than markets expect. With that in mind, we’ve been adding back to growth names in sectors such as technology (particularly semiconductors), communications services and health care, mostly in the U.S. We’ve also been buying depressed names in the consumer sector, including auto names such as Magna MG-T, Martinrea MRE-T and General Motors GM-N. Auto inventories are quite low, and manufacturers will need to ramp up again once the semiconductor shortage is resolved. Another name we’ve been adding to is Ski-Doo maker BRP DOO-T. The stock is acting as though we’re heading into a massive downturn and consumers won’t spend again. I’m finding lots of those types of opportunities. We’ve also been adding back some oil names on the recent weakness, including Crescent Point Energy CPG-T, Whitecap Resources WCP-T and Arc Resources ARX-T. Crescent Point is a stock we sold out of entirely at $13 in the spring and bought it back recently at $8.50.
What have you been selling/trimming in recent months?
We did lighten a bit on the natural gas, base metals and gold stocks recently, as investors began worrying about economic growth. Some copper names we trimmed included Teck Resources TECK-A-T, First Quantum Minerals FM-T and Hudbay Minerals HBM-T. We didn’t have a big position in the Canadian banks, but I did lighten a bit there too. I sold out of CIBC CM-T and trimmed Scotiabank BNS-T, which is the only name I hold in that sector right now. I just thought some of the tailwinds of the past two years for the banks are probably headwinds over the next couple of quarters.
What is the best stock tip you’ve given a friend or family member?
He’s not a family member, but in 2012 my barber asked me for my best stock idea, and I suggested Microsoft MSFT-Q. The company was out of favour at the time and trading at low multiples, but I felt it had longer-term potential. I’m not sure if he ever bought it – I didn’t ask, and I lost touch with him since the pandemic – but the stock has gone from about $25 then to about $250 today, which is a pretty good return if he did buy it.
This interview has been edited and condensed.
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