Brokers picks for 2006: Dollar jitters sway tipsters

Uncertainty over the future of the economy and the strong dollar are themes dominating the brokers' share tips for the coming year.

Of the eight brokers participating in this year's survey, Fisher & Paykel Healthcare and Contact Energy are most in favour, getting three recommendations apiece. But that is not saying much. This year's survey has a wide divergence of views.

One less broker participated - UBS felt it was unable to recommend stocks this time out because of conflicts of interest - yet the number of companies highlighted fell by only one, to 29. Top picks in past years gained as many as six recommendations.

Goldman Sachs sums up the views when justifying its tips: "We like stocks with minimal domestic exposure, given our cautious view on the local economy. Fisher & Paykel Healthcare, Fisher & Paykel Appliances, Pumpkin Patch and Guinness Peat Group have either all, or a significant portion, of their earnings derived from offshore.

"Secondly, stocks that will benefit from a weaker dollar appeal to basically the same group.

"Near term, the dollar is a headwind for these stocks and may yet provide earnings risk. However, as the year progresses, we expect a falling dollar to become a tailwind for these stocks."

First NZ Capital's tips turned in the best performance last year.

The collective returns of its portfolio - broadcaster CanWest MediaWorks, Contact Energy, GPG, Mainfreight and Vertex - were 23.4 per cent.

This compares with the rise in the wider sharemarket of 10.3 per cent, a figure beaten by only three of the nine brokers.

Direct Broking, which picked 2004's best performing portfolio, this year picked vodka-maker 42 Below, eftpos equipment supplier Cadmus, the NZX, New Zealand Oil & Gas and Air New Zealand. They returned a 13 per cent loss.

Forsyth Barr came last with a loss of 21.6 per cent. Its portfolio was weighed down by Feltex and Pod which delivered profit warnings over the year.

Forsyth Barr said at the start of the year it believed the economic conditions would be resilient, but local shares looked fully priced. It aimed for a conservative 10 per cent return, but it was bitten by the building slowdown in Australia.

Pointing out the biggest flaw of making choices for just one year, it said: "This changing environment highlighted the need for clients to review portfolio positions and our picks at the beginning of the year were reviewed and changed.

"A 12-month top five selection that is not reviewed when required assumes that, at the time of selection, you have a reasonably high level of conviction. This is not always the case." It is partly for this reason that some brokers have not participated in the survey.

Contact Energy is in favour because most brokers believe concerns about its earnings prospects are overdone.

The electricity generator is moving into a tougher business environment as it faces higher natural gas costs as Maui gas runs out. The Commerce Commission is also investigating claims of anti-competitive behaviour.

ASB Securities says: "The stock will benefit from low lake levels this year, leading to higher spot prices for electricity. It is good value at current prices."

Guinness Peat Group, infrastructure investor Infratil, Mainfreight, Port of Tauranga, Apple Computer distributor Renaissance and Telecom all got two picks apiece. GPG is a perennial favourite.

Like last year, brokers say the market has yet to fully appreciate the company's asset base and the potential in its investment in Coats, the zip-and-thread maker. The English firm, boasting 30,000 employees, was taken over by GPG almost two years ago with a 200 million investment.

First NZ Capital says: "The investment in Coats is expected to be a strong value driver. The valuation is also expected to benefit from a retracement in the dollar."

McDouall Stuart says Infratil, which bought the Stagecoach bus and train operations for $250 million last month: "We have continued with Infratil given the recent acquisition of Stagecoach and the synergies and proven track record of extracting value from acquisitions."

High-profile Wellington businessman Lloyd Morrison founded Infratil in 1994. It has made a name for itself investing in utilities, ports and airports, including those in the far flung corners of Europe on the cut-price airline networks.

Mainfreight would benefit from the consolidation of rival Owens, acquired this year after a bitter fight with minority shareholder Toll Holdings.

"Its excellent management is turning the company into a significant global logistics operator," ASB Securities said. "About 40 per cent of earnings now come from offshore, which insulates it from a New Zealand slowdown."

ABN Amro and Direct Broking like Port of Tauranga. ABN will not comment, but Direct reckons the expected weakening in the dollar will boost the port's forestry volumes.

Hamilton Hindin Greene likes Telecom, claiming it is rapidly developing a suite of non-core products such as information technology services to counter rising competition in its traditional calling revenues.

Renaissance is not carrying enough debt on its balance sheet, First NZ Capital says, and as a result it could increase its dividend. It is benefiting from new technologies such as the Apple Ipod. The most unusual picks were ABN Amro's choice of cash, presumably as a protection against overvalued sharemarkets.

Meanwhile, Forsyth Barr has recommended its clients to buy the WINZ fund, a basket of overseas investments denominated in New Zealand dollars.

"Reflecting our outlook for NZ is for an economic slowdown, with the potential risk of a harder landing, we believe investors should be made aware that they can gain access to world markets through the NZSX-listed securities, such as WINZ," Forsyth Barr said.

"WINZ will provide investors with access to global equities and also benefit from depreciation in the dollar."