Local stocks beat expectations

Photo / Kenny Rodger

The optimists were right. Stock markets across the globe were oversold in the panic of 2008 and for those with nerves of steal, opportunity abounded in 2009.

Warren Buffett told the world to buy while the buying was good. Congratulations to those who listened.

After some big losses last year, all of the brokers who took part in the Business Herald's 2009 Brokers' Picks made good returns.

The winner - Goldman Sachs - made a 28.6 per cent return on its portfolio of five stocks.

The worst performers still topped 14 per cent - a stellar return when compared to the deposit rates offered by the retail banks.

Five out of eight brokers beat the NZX this year and all but one are ahead of NZX returns for the past five years.

Goldman's result was driven by their shrewd picking of two of the year's best performing stocks - Tower, which returned 48 per cent, and Fletcher Building, which returned 44.7 per cent.

First NZ Capital and Forsyth Barr (second and third respectively) also picked Fletcher Building. Forsyth Barr got a lift from Ryman Healthcare, which returned 47 per cent.

First NZ Capital's counter-intuitive pick of retail stock The Warehouse also paid off - it returned 41 per cent.

Retail stocks generally performed well this year given the strain the recession was putting on the wallets of consumers.

Restaurant Brands and Pumpkin Patch both more than doubled their share price during the year. Hallenstein Glassons also rose nearly 60 per cent.

Christchurch-based Hamilton Hindon Greene did well to pick Westpac (63.1 per cent) as the banks roared back this year but hit a snag with manufacturer Nuplex, which had debt troubles and dropped 41.7 per cent by the deadline of last Friday's market close.

Of course, Brokers' Picks is an investment game. For many investors in the real world the big returns this year only partly repair the damage done by the global financial crisis the year before.

But given the dire predicament the world faced at the end of last year the returns offered by many of the local stocks have outdone expectations.

Now the big question is, can it last?

Looking forward to next year with some hope that the rally will continue, brokers have picked a diverse spread of 27 companies they see as good prospects.

Let's hope that points to a broad-based recovery.

Certainly it will be reassuring to the NZX that brokers see such a wide range of quality stocks at present.

However, for the second year running, Telecom doesn't get a single pick. Such is the spread of picks that even the most popular, F&P Healthcare, gets just three picks.

The popularity of F&P Healthcare has been one of the regular features of the Business Herald Brokers' Picks.

The company has a good track record of steady growth even in the face of the high currency which has curbed its New Zealand dollar export receipts.

The dollar remains an issue for all exporters and it is a brave punter who would base their picks on a fall in the fortunes of the high-flying kiwi.

But even if the currency remains where it is, F&P Healthcare is well placed for growth next year.

It is ramping up here and at new facilities in Mexico to cope with soaring demand for its respiratory devices.

Part of that is down to the H1N1 virus (swine flu) which has state health care providers the world over stocking up on equipment for treatment of the disease.

The other driver is snoring (or the treatment of), which turns out to be a relatively recession-proof disorder. Growth in demand for F&P's sleep apnoea masks continues at pace as the world's population gets older and fatter.

Another health-related company with demographics on its side is Ryman Healthcare. After a strong year this year it is one of a handful of stocks to get two picks from our competing brokers.

Ryman develops, builds and runs retirement villages throughout the country.

John Kidd, whose team at McDouall Stuart picked Ryman this year, notes the company has returned compound annual profit growth of 24 per cent a year over the past four years.

"We forecast Ryman to return EPS [earnings per share] growth of close to 10 per cent in 2010. Ryman is a high quality company with a good land bank and strong, stable cash flows to support future developments," he says.

The other stocks to be picked twice this year were Tower, Methven, New Zealand Oil & Gas, Auckland Airport and most interestingly Nuplex, which is picked by Goldman Sachs and First NZ Capital.

Nuplex had a horror year this year, getting caught halfway through an expansionary phase when the financial crisis hit. It breached banking covenants and faced some hair-raising days as it went to the market to raise capital.

It wasn't pretty but it survived and there is now some logic to picking that it will be able to find its feet next year.

Already since the close of the 2009 game the resin manufacturer has upped its profit guidance for the year to June 30 to between $110 million and $120 million from between $100 million and $110 million.

If the global economy continues to stabilise and the restructuring process is well managed then it may prove to be oversold.

A similar logic is used by Forsyth Barr to back their pick of PGG Wrightson next year. It is another of the three big companies that hit real problems with debt this year and will be hoping for a much improved year. The other - F&P Appliances - does not feature in any of the brokers' picks.

Forsyth Barr also picks GPG and Contact Energy, two other stocks that disappointed in 2009.

Contact is now trading at significant discount to valuation, notes Forsyth's Guy Hallwright.

Of GPG he notes: "Limited downside from here, capital return/wind-up in prospect, benefits from a fall in the NZD, 2010 should be the year GPG finally performs."

Auckland International Airport - picked by Forsyth Barr and ASB Securities - is generally considered a good defensive stock and next year it could benefit from a surge in passenger numbers.

NZ Oil and Gas - picked by McDouall Stuart and Hamilton Hindin Greene - has been a star performer over the past two years, rising more than 60 per cent during a period when the wider index has retreated by more than a quarter.

McDouall's Kidd remains optimistic about its prospects as it awaits permits for new wells.

He notes that the oil price looks to be moving back in its favour and that its stakes in the Kupe gas field and Pike River Coal mine should add to ongoing earnings from the Tui field.

All brokers have disclosure statements available on request and free of charge.

FACTORS TO CONSIDER

Before using the Business Herald survey to choose a broker or stocks, readers should recognise that the results are skewed by some features:

* The figures exclude brokerage fees.
* Brokers are asked to choose the securities that will give the best short-term performance. If they had been asked to choose, for example, for a five-year term, the results might be different.
* The survey does not allow brokers to review choices during the year.
* The survey implies a one-size-fits-all approach. It takes no account of individual circumstances such as an investor's appetite for risk, requirement for income or tax circumstances.
* The survey is not exhaustive. Macquarie Equities, UBS and Citigroup are obvious omissions.
* Finally, past performance is no guarantee of future performance.