Brokers select their top five prospects for 2019. Photo / Getty Images
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 well-placed 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 resolution 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 longer-term 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".
A combination of a fledgling small cap star and one of the best performing mature companies helped Vulcan Capital, now Foster Capital, to top spot in the 2018 Brokers Picks competition.
NZX newcomer QEX Logistics proved a solid pick, even though it was about as speculative as you can get in this game. It had announced its intention to list last December but had not yet done so.
QEX Logistics was founded by husband and wife Ronnie and Doreen Xue in their Auckland garage in 2010 when demand was heating up for the types of clean and green products New Zealand was known for.
The company aims to make it easier for manufacturers to do business with China by cutting out middlemen and allowing their products to be sent directly to the buyer.
It listed in February and first traded at 45c. It finished at $1.14 - up 153.3 per cent for the period of the Brokers Picks game (to December 14, 2018).
The other good pick that Vulcan made was Restaurant Brands. It wasn't alone with that one - Hobson Wealth and Craigs Investment partners also backed the fast food retailer.
Restaurant Brands has been one of the standout among established New Zealand companies in the past few years and this year's takeover offer helped to boost the annual return. Finaccess Capital's $881.5 million bid for 75 per cent of Restaurant Brands looks like becoming a done deal after the Mexican asset management company won the board's approval.
At a 24 per cent premium to the pre-offer share price, it looks like a big contributor to the company's annual return of 23.5 per cent.
Craigs, in second place this year, also picked market star a2 Milk, which returned 38.5 per cent. A2 has been a volatile stock this year and at one point was up 74 per cent on its January 1 price. But beneath the speculative action there is a solid company that has been steadily executing a clever strategy in China.
Craigs successfully picked a number of the best performing blue chips this year. It had Mainfreight, which returned 24.7 per cent and Meridian Energy which returned 23.4 per cent.
If it hadn't been for Tourism Holdings (-4 per cent) falling away in the second half of the year it might have run close to the top spot
The other big performers in 2018 included tech company Plexure Group. The mobile marketing software maker delivered a 75.4 per cent return based on some solid deals done during the year including the roll-out of an app for McDonalds NZ. Xero delivered a 45 per cent return, mostly on the ASX. The accounting software firm snuck into the competition for the final time in 2018 as it started the year NZX listed.
That combo helped lift MSL Capital into third place this year.
A strong performance for movie software company Vista Group, up 37.4 per cent, put Hobson Wealth into fourth place.
At other end of the ladder, construction firm Fletcher Building, down 33.9 per cent, did not turn a corner in 2018. That, and poor performances for Manuka Honey firm Comvita (-32.9 per cent) and Sky TV (-16.6 per cent) left Hamilton Hindin Greene at the back of the pack.
Readers should recognise that the results of the Brokers Picks are skewed by some features of the game. The figures exclude broker 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, 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, need for income or tax circumstances. The views expressed do not constitute personalised financial advice and are not directed at any person. Finally, past performance is no guarantee of future performance
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