After the fall

United States investment guru Warren Buffett might have been putting national interest ahead of common sense when he advocated buying in to equity markets in October. At the time the financial world was still on the brink of something terrible and unprecedented.

"Be fearful when others are greedy, and be greedy when others are fearful," he wrote in a New York Times opinion piece.

The advice makes sense at any time.

Of course markets have fallen further and then rallied since then and they may not have yet hit bottom. Another bolt of bad news - the failure of US carmakers looks a good bet - could send things reeling again.

But what we can be sure about is how far markets are down on last year. The NZX-50 is off about 33 per cent, for example.

For those who are smart enough, or brave enough, to keep looking forward that figure represents a whopping discount rather than just a loss. That is the thinking that has influenced brokers as they offer up their picks for next year.

Businesses that can generate cash in a recession and that appear to be oversold in the panic have come to the fore.

The top stock - picked by five of our eight participating brokerages - is Fisher & Paykel Healthcare.

The medical equipment maker has been a great hope for New Zealand investors for a few years now.

It has established a strong position in the US market for sleep apnoea masks, which treat a kind of chronic snoring problem related to obesity. Increasing diagnosis makes it one of the fastest-growing medical problems in the US.

But until now Fisher & Paykel Healthcare has, like all exporters, been hamstrung by the high dollar. That problem is fast abating.

"The healthcare sector is among the most resilient to economic downturn, and with FPH experiencing strong growth in demand for its core sleep apnoea, respiratory humidification and neonatal products, we expect FPH to perform well in 2009. Solid dividend stock, currently yielding 6.2 per cent," says McDouall Stuart.

"Earnings will catch up with the underlying revenue growth the company has continued to achieve, and we expect FY10 earnings to be more than triple FY08 earnings," the team at ASB Securities notes.

Four out of eight brokers picked Fletcher Building. The star performer of the past few years still faces challenges with the slowing construction sector and its US Formica division, but is oversold.

"Earnings will be under pressure for 2009, but further downgrades are already discounted into the share price. By late 2009, we expect the market will be looking forward to a recovery in 2010 and will begin to re-rate FBU accordingly. In the meantime, FBU has a 12 per cent yield to satiate, which as interest rates continue to fall away looks more and more appealing."

The other top stock by market capitalisation to feature heavily is Contact Energy, picked by three brokers. It too comes at a big discount to last year.

The logic - according to brokers Hamilton Hindin Greene - is pretty straightforward.

"Demand for electricity inelastic, no new energy providers coming to market, defensive stock."

The same kind of defensive thinking comes into play with lines company Vector, which gets picked twice.

"Defensive regulated earnings and an attractive dividend yield. The ongoing buyback will support the price," says ASB.

Likewise TrustPower, which is picked twice. "Defensive utility, renewable generation portfolio with option value, leveraged to long-term electricity price growth, strong management team," says ABN Amro Craigs.

The only other stock to get three picks this year was Sky Television, perhaps surprising since it is an importer of foreign content and benefits from a high dollar.

"Sky TV will find acquiring and keeping subscribers more difficult in the current economic conditions, but we believe the market has priced in an overly pessimistic scenario. The election of National to Government allays some concerns over possible regulation of access to content," says ASB.

SkyCity, NZ Oil & Gas and Ryman round out the stocks to earn more than one pick this year.

Rest-home operator Ryman has been sold off on the general negativity about the property sector, notes the Forsyth Barr team.

But it "has compelling demographics in its favour and is a market leader in a relatively young industry".

"The current weakness is an opportunity for investors with a longer timeframe to acquire an interest in a leading New Zealand-focused success story with a solid growth profile."

SkyCity comes through because it has such a strong management position and because many of its recent woes are perceived to be of its own making - meaning there is good scope for the new management team to turn the business around.

NZ Oil & Gas was one of the top performing stocks of the year through the first two-thirds of this year. But the commodity slump turned that around dramatically. It, however, gets two picks this year.

"The arrival to market of the Kupe field and the ramping-up to full production of the Pike River coal mine are both expected to occur in mid-2009, and will be major events for NZOG. These milestones, a weaker US dollar and a sizeable 2009 exploration campaign targeting the already successful Tui licence area, should more than offset concern over oil price through 2009 and beyond," says McDouall Stuart.

The most notable absence is Telecom. The telco wasn't picked by a single broker despite trading at a similarly big discount to last year as stocks such as Contact and Fletcher.All brokers have disclosure statements available on request and free of charge.