John Zechner, chairman and founder of J. Zechner Associates
FOCUS: North American large caps
Top Picks: Veren, Lightspeed Commerce, Atkinsrealis Group
MARKET OUTLOOK:
Following the sharp sell-off and subsequent recovery in stocks in August, investors were noticeably nervous as we headed into September, historically the worst month for stocks. While the market got off to a rough start again in the first week, it was straight up after that as the U.S. Federal Reserve’s jumbo-sized rate cut and the promise of more easing to come. This reignited hopes for a soft landing for the U.S. economy, while inflation pressures continue to recede. Fed Chair Jerome Powell unveiled his latest buzzword to describe monetary policy, with a “recalibration” of policy at a pivotal moment for the central bank.
With stocks trading back near record-high valuation levels and sentiment rushing back to excessively bullish, we need to see exceptionally strong third-quarter earnings reports and outlooks when these start to come in next month. There are no global catalysts for a resumption in growth. This means that interest rates will go down further and stay lower for longer, much like they did for the entire decade prior to the pandemic. This will be a continued tailwind for elevated stock valuations, technology and high dividend yield stocks. Massive fiscal deficits in the major economies leave little room for additional stimulus, meaning that growth will return to the low levels of the past decade. Cyclical stocks in the industrial and consumer sectors will see lower earnings growth. This favours continued investment in those sectors that can exhibit growth (technology) as well as the companies that can pay out higher income via dividends (telecom sector, utilities and energy).
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TOP PICKS:
Veren (VRN-TSX)
Veren’s recent underperformance has resulted in an improved entry point as the market continues to underappreciate the potential free cash flow growth, the value of asset optimization, and how much the overall business has improved since 2018. It has a completely revamped asset base, which is now 75 per cent concentrated in high-impact plays (Montney/Duvernay), long-term growth, inventory depth, return of capital, and modest financial leverage and trades at only 2.8 times operating cash flow multiple.
Lightspeed Commerce (LSPD-TSX)
Lightspeed provides an easy-to-use omnichannel POS software platform. Its software enables retail and hospitality merchants to manage operations, accept payments and grow their businesses. Lightspeed’s platform is used at around 165,000 organic customer locations. Lightspeed’s shift in strategy should yield improved business plan execution and revenue growth, and expand adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) as 2025 progresses. Growth can come from higher subscription revenue. The announcement last week that they have engaged JP Morgan to look at strategic alternatives, including a sale of the entire company, should accelerate the realization of this undervaluation. Lightspeed trades at 1.8 times EV/F2025E sales versus peers at around 5.5 times in C2024E.
Atkinsrealis Group (ATRL-TSX)
The former SNC-Lavalin Group Inc. is a professional services, and project management company. It delivers end-to-end services across the whole life cycle of an asset including consulting and advisory and environmental services. ATRL’s core Engineering Services Regions and Nuclear segments are well-positioned to continue realizing strong organic revenue growth and margin expansion. Top-line growth is supported by robust backlogs and favourable demand trends, while management is focused on driving margin improvement in engineering services (around 75 per cent of TTM revenue). Nuclear segment is underappreciated in the current valuation and could see potential life extension of the Pickering reactors. Risks as always include possible cost overruns and/or cash outflows associated with LSTK Projects work, a weakening of end-market conditions or failure to deliver improved margins. But the valuation is attractive at 10.7 times and 8.8 times 2024/2025 adjusted EBITDA, a discount compared to Canadian engineering services peers.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| VRN TSX | Y | Y | Y |
| LSPD TSX | Y | Y | Y |
| ATRL TSX | Y | Y | Y |
PAST PICKS: November 7, 2023
Paypal Holdings (PYPL NASD)
- Then: US$54.63
- Now: US$76.99
- Return:41%
- Total Return: 41%
Pembina Pipeline (PPL TSX)
- Then: $43.89
- Now: $56.05
- Return:28%
- Total Return: 35%
Martinrea International (MRE TSX)
- Then: $12.38
- Now: $11.16
- Return:-10%
- Total Return: -8%
Total Return Average: 23%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| PYPL NASD | Y | Y | Y |
| PPL TSX | Y | Y | Y |
| MRE TSX | Y | Y | Y |