John Zechner, Chairman & Founder, J. Zechner Associates
Focus: North American large caps
Top Picks: Constellation Software, North American Construction, Microsoft
MARKET OUTLOOK:
Canadian stocks continued their upward move in February, driven by ongoing strength in basic materials, energy and banks. U.S. stocks, on the other hand, continued to struggle as the AI-fuelled technology rally ran into some serious headwinds.
The S&P500 had its worst month since ‘Liberation Day’, falling over one per cent while Nasdaq fell over three per cent.
The market continues to experience a shift from the high technology ‘growth’ sectors to the value-oriented cyclical groups such as banks, resources, and industrials.
Tech stocks have been under pressure, but we believe that the reason why the reaction to these threats in the stock market have been so severe is because technology was a ‘crowded trade’ that is now in the process of unwinding.
Public investment in the stock market reached record highs last year and most of this new money had gone into the tech sector.
That had also driven the weighting of the biggest tech names in big indices such as the S&P500 to records while the growth in ‘passive investing’ had driven even more money into those indices.
The result has been an average exposure to the technology sector in both active and passive funds that was far higher than it had ever been and held by investors who were either driven solely by momentum or quantitative trading programs and were therefore less committed to being long-term holders.
This has led to higher average levels of volatility in the stock market. In this type of environment, stocks tend to overshoot on the downside just as they did on the upside.
Overall, we continue to have ‘slightly below normal’ equity exposure, a slight underweight in bonds and ‘higher than normal’ cash levels.
Biggest overweight sectors continue to be defensive ones such as telecom, energy infrastructure, and industrials.
We reduced some positions in long-term U.S. bonds on the rally in the past month, since we expect the inflation numbers to remain stubbornly high and the U.S. administration to continue to try to run the economy ‘hotter’, thus keeping long-term interest rates at elevated levels.
On the stock market, we had reduced technology weights earlier, selling positions in the semiconductor and hardware names but would be looking to add back on further weakness since we still the growth stories as being intact.
We continue to also see good value in the energy and gold stocks in Canada as well as some of the industrials which will benefit from ongoing infrastructure spending.
On the other side, we remain underweight the financials due to both excessive valuations as well as risks from technological disruptions.
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TOP PICKS:
Constellation Software (CSU TSX)
The company is a Canada-based provider of software and services to a variety of industries. The Company acquires, manages and builds vertical market software (VMS) businesses that provide mission-critical software solutions.
Software stocks have been under severe pressure in the past six months due to fears about their ultimate redundancy due to the growth of AI.
We had not owned CSU for years due to worries about its excessive valuation, but that has dropped sharply on the selloff as well as the departure of founder Mark Leonard and is now much more attractive at around 12 times operating cash flow. Also, with software under pressure and the additional worries around private equity, Constellation will be in a very good position to use their strong cash balance and free cash flows to increase their acquisition rate and sustain the growth model that has worked so well for the company over the past two decades.
North American Construction (NOA TSX)
The Company is a provider of heavy civil construction and mining services in Australia, Canada, and the United States, providing services to the mining, resource and infrastructure construction markets.
This infrastructure spending is accelerating as countries attempt to domicile global production.
The stock trades at a significant discount to comparable engineering service companies due to the view that it remains almost solely focused on the development of heavy oil projects in Canada.
That source of revenue has dropped to about 10 per cent of the total with construction projects in Australia being a much larger component now.
A name change for the company seems to be in order!
Microsoft (MSFT NASD)
Like most tech stocks, Microsoft has come under pressure in the past few months, falling over 25 per cent from last year’s high which has the stock now trading at around a ‘market multiple’ of about 22 times forward earnings despite reporting ongoing 40 per cent annualized growth in its cloud services (Azure) unit, exposure to AI through its ownership position in OpenAI and continued dominance of the operating system of over 80 per cent of the world’s desktop and laptops.
Microsoft is in a better position to monetize its AI spending than it’s peers thereby mitigating the growth risks that the investors seem to be worried about.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CSU TSX | Y | Y | Y |
| NOA TSX | Y | Y | Y |
| MSFT NASD | Y | Y | Y |
PAST PICKS: JULY 24, 2025
Rogers Communications (RCI.B TSX)
Then: $47.06
Now: $54.73
Return: 16%
Total Return: 18%
B2Gold (BTO TSX)
Then: $4.79
Now: $7.57
Return: 58%
Total Return: 59%
Pembina Pipeline (PPL TSX)
Then: $50.60
Now: $60.13
Return: 19%
Total Return: 22%
Total Return Average: 33%
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| RCI.B TSX | Y | Y | Y |
| BTO TSX | N | N | N |
| PPL TSX | Y | Y | Y |
