PICKING WINNERS
Brokers select their top five prospects for 2019
While prospects of a more volatile, and possibly bearish market in 2019, might warrant a flight to safety for those picking stocks, it hasn't stopped 2018's NZX standout, a2 Milk, topping the list in our annual Brokers Picks survey.
A2 features in the choices of five out of the eight firms in this year’s survey.
Despite a rollercoaster ride on the markets this year, the milk company delivered a return of 32.2 per cent in the 2018 brokers picks making it hard to ignore in 2019. It reported a 116 per cent lift in its net profit to $196 million for the June year.
With plenty of speculative interest from investors in Australia the shares can surge or slump at the slightest news announcement. But last month an upbeat AGM and news of favourable regulatory conditions in China see it end the year on a positive note.
“ATM is probably the highest risk proposition among our picks, largely due to potential risk around Chinese sales channels, regulation and competition,” says Craigs Investment Partners Head of Research Mark Lister.
”However, the company has made excellent progress in recent years, particularly with its infant formula products. We remain positive on the long-term growth prospects for the company.''
Hobson Wealth Management Mark Fowler said the market had discounted a2 on fears of regulation in China. “We see that a2 is wellplaced to weather any changes in the existing regime, and continued to see demand for its products and rational competition in its markets.”
Playing it safe isn't always the best way to win a game like brokers picks and, especially in the bull market of past several years, taking a punt on a growth stock has been a sound strategy. But while there is still a few of those in the mix, this year’s picks are notable for the number of tried and tested companies with long track records of success.
Power companies Meridian and Contact Energy get a look as does infrastructure investor Infratil.
The second most popular stock this year with four picks is a company that ticks the boxes as a dependable, mature company and a growth prospect — Mainfreight.
Celebrating its 40th anniversary this year, Mainfreight reported a net surplus after tax (before abnormal items) of $55.9m for the six months to September 30 — a 30.7 per cent increase on the same period in the 2017/18 year.
Under the stable watch of founding chairman Bruce Plested and long-time managing director Don Braid, the company has managed to keep growing domestically and internationally without taking big risks.
Stocks that feature with at least two picks include F&P Healthcare, Sanford, Ebos.
“New Zealand has the fourth largest marine fishing area in the world, and one of the cleanest, which gives Sanford a unique opportunity to produce and sell value-added products into international markets,” said Shareclarity’s Daniel Keiser on his reasons for picking Sanford.
“The lower currency, falling oil prices and hopefully a better marine climate to last year should also help.”
F&P Healthcare may also benefit from the lower kiwi dollar as its major market is now the US. The company was sold off heavily in the second half of the year and punished by investors after getting embroiled in a legal stoush.
A US medical equipment maker, ResMed, alleged to the United States International Trade Commission that the Auckland-based company had infringed its patents. A resolu- tion to those issues would likely be a green light for investors.
Ebos is another medical equipment company with a solid track record on the NZX. It had been “a quiet achiever for many years on the back of astute acquisitions and sensible management”, said Lister. “We like the healthcare sector generally, given the backdrop of an ageing population and the resilience of healthcare products and services regardless of where we are in the economic cycle.”
So it’s not surprising to see a couple of other health and age care companies — Arvida and Oceania Healthcare — in the picks. Ultimately this year’s choices are spread broadly with numerous companies getting just one pick. Of those, Fletcher Building stands out because it is usually a firm favourite of brokers. After a tough year in 2017, it was picked by Hamilton Hindin Greene last year and managed to disappoint again. This year Hobson Wealth is sticking with it on the basis it still has a solid business if it can get its strategy in order.
It remains the dominant building player in the New Zealand market, says Hobsons’ Fowler.
“Missteps in Building and Interiors division and recent weakness in Australia has weighed heavily on the stock,” he said. “We feel this price action is overdone and there is opportunity for the stock to re-rate as earnings normalise.”
As Forsyth Barr analysts note in their 2019 outlooker, global and political uncertainty will “continue to impact sentiment and result in a number of twists and turns as well as a few rocks on the road”.
Shares also face headwinds due to upward pressure on global longerterm interest rates as bond demand diminishes and supply increases.
Forsyth Barr’s advice is to look to stable companies with quality attributes and valuation support.
And “to retain a mix of structural growth and defensive yield with the former providing the best value for risk — the latter where underlying valuation supports an offset during periods of volatility”.