Stock market: In tricky waters

Photo / Sarah Ivey

It's been a volatile year for the New Zealand stock market, with the first half reflecting a strong bounce back in share prices followed by another dip.

Since early September there has been a recovery but the overall performance of the market has been lacklustre, with the NZX50 index up just 4.6 per cent in the year to December 10.

The high volatility has also resulted in a large range of results from this year's Business Herald 2010 Brokers' Picks competition.

For the current year by far the most popular two stocks picked as winners for next year are outdoor clothing retailer Kathmandu and infrastructure investor Infratil. Both companies have the backing of three broking firms each.

The winner for 2010 - First NZ Capital - made a 33.5 per cent return on its portfolio of five stocks while the worst performers had negative returns.

Only three out of the seven brokers managed to beat the index, showing the results were dependent on which stocks they picked.

First NZ Capital's result was driven by its selection of Restaurant Brands - the best performing stock in the NZX 50 this year - which returned 82.2 per cent.

Nuplex, which had a shocker of a year last year when it hit debt problems and had to raise new capital, was also a strong performer, returning 47.4 per cent.

First NZ Capital was the only broking firm not to see any of its five picks fall into negative territory. Second place-getter Goldman Sachs & Partners also benefited from the Nuplex rise as well as a boost from market mainstay Mainfreight which rose 40.6 per cent.

Former sharemarket darling F&P Healthcare was the only stock to weigh Goldman down, falling 0.7 per cent after it was hit by a strong New Zealand dollar.

Craigs Investment Partners, in third place, was also affected by the F&P Healthcare fall but its other health player, retirement village operator Ryman Healthcare, proved a better choice, returning 11 per cent.

Middle of the pack performer McDouall Stuart had the best performing individual stock with its bet on Diligent Board Member Services - a company which provides a web-based portal service to help keep directors up to date on the latest company information.

The stock rose 93.5 per cent during the year. The New York-based company had a rocky start when it first listed in December 2007 after its founder Brian Henry failed to be open about his past and that of his convicted fraudster brother, Gerald.

The company has been rapidly clawing back ground since then although it has yet to rise above its $1 listing price.

McDouall Stuart also had the unfortunate double blow of having both Pike River Coal and New Zealand Gas & Oil - the largest shareholder of Pike - in its five picks.

NZOG shares fell 28 per cent in one day after coming off a trading halt five days after the Pike River mine explosion which killed 29 workers on November 19.

Pike's shares remain permanently suspended. Their official last trade was at 88c but in a brief trading window accidently opened by the stock exchange on December 2 trades went through at 22c. They were then reversed and cancelled.

Since the December 10 cut-off point for the broker picks competition the company has gone into receivership, with the NZX placing a zero cents value on its exit from the indices.

But any equity left in the business has yet to be determined and will depend on whether the mine can be reopened again and if it manages to secure the $100 million insurance payout.

Where some would be cautious, others see opportunities in stocks that have been beaten down.

Macquarie Securities, which has rejoined the Herald's Broker Picks competition for 2011, has picked NZOG as a comeback stock for next year.

Macquarie head of research Stephen Hudson says NZOG has been hard hit by its association with Pike River but assuming there is no residual value for its 29 per cent stake NZOG is trading at a significant discount to the value of its underlying oil and gas assets and continues to hold significant cash reserves.

"New Zealand Oil and Gas should provide good exposure to the expected 2011 oil price strength."

Looking ahead, Kathmandu, which dual-listed in Australia and New Zealand at the end of last year, had a strong start to the year, trading as high as $2.57 in April on the NZX but has fallen back since.

Like all players in the retail sector, the firm had felt the tightening of consumer spending but it is upbeat about its future, planning to open 15 new stores across Australasia in the next year while boosting its product range 30 per cent over the next three years.

Hudson says despite the challenging trading environment Kathmandu's business model and growth outlook remain intact.

"Kathmandu offers leverage to an improvement in retail conditions and the rollout potential of the brand, and its contribution to sales momentum is not reflected in current prices."

Infratil backers will no doubt be hoping its investment in the Shell downstream assets this year begins to start paying off next year.

The $700 million buyout of Shell NZ, in conjunction with the New Zealand Superannuation Fund, was the biggest deal of the 2010 year.

Other popular picks for next year include Contact Energy, Fletcher Building, Westpac Bank, Ryman Healthcare and Sky TV, which all received backing from at least two brokers.

Fletcher's bid for Australia's Crane Group business could create some strong synergies if it manages to convince Crane shareholders to agree to the deal.

Craigs Investment Partners head of research Mark Lister says Fletcher provides high-quality exposure to a generalised pick-up in economic activity, particularly in residential construction. Fletcher has been selected by the Earthquake Commission to project-manage more than 50,000 repairs to homes damaged by the Christchurch earthquake.

Lister says he has also picked Australian bank Westpac despite the potential for the currency to work against it when picking an Aussie stock. "Westpac Banking Corporation operates a sound banking franchise with a balanced exposure to both the retail, corporate and institutional sectors. The company provides exposure to the well-placed Australian economy, and looks reasonably well-priced at present with an attractive dividend yield."

SELECTIONS FOR 2011

Craigs Investment Partners
* Auckland Airport
* Contact Energy
* Fletcher Building
* Westpac Banking Corporation
* Henderson TR Pacific

Hamilton Hindin Greene
* Pyne Gould Corporation
* Ryman Healthcare
* Sky City Entertainment
* Tower Corporation
* Westpac Banking Corporation

First NZ Capital
* Contact Energy
* Kathmandu
* Opus International Consultants
* Nuplex
* NZX

Goldman Sachs & Partners
* Infratil
* Kathmandu
* Fisher & Paykel Healthcare
* Mainfreight
* Sky Television Network

McDouall Stuart
* Diligent
* Fletcher Building
* Infratil
* Michael Hill
* Ryman Healthcare

Forsyth Barr
* Delegat's
* Infratil
* Guinness Peat Group
* Sky City Entertainment Group
* Pumpkin Patch

Macquarie
* Sky Television Network
* New Zealand Oil and Gas
* Kathmandu
* Restaurant Brands
* Skellerup

THE PAST YEAR'S PICKS
12 months to December 10, 2010
* Subsequent to cut off point for the competition Pike River Coal has gone into receivership and been suspended

First NZ Capital
* Nuplex NPX 47.4%
* Tower TWR 11.6%
* Restaurant Brands RBD 82.2%
* The Warehouse WHS 1.1%
* Opus International OIC 25.3%
* Total 33.5%

ASB Securities
* Sky TV SKT 9.6%
* F&P Healthcare FPH -0.7%
* Pumpkin Patch PPL -12.0%
* Methven MVN 8.1%
* Auckland Airport AIA 16.1%
* Total 4.2%

Goldman Sachs JBWere
* Mainfreight MFT 40.6%
* Methven MVN 8.1%
* Infratil IFT 21.4%
* F&P Healthcare FPH -0.7%
* Nuplex NPX 47.4%
* Total 23.4%

Craigs Investment Partners
* Ryman Healthcare RYM 11.0%
* F&P Healthcare FPH -0.7%
* Freightways FRE 4.5%
* SkyCity SKC 1.7%
* Templeton Emerging Markets TEM 20.9%
* Total 7.5%

Hamilton Hindin Greene
* Fletcher Building FBU 5.0%
* NZ Oil & Gas NZO -44.1%
* Pyne Gould Corp PGC -12.7%
* Rakon RAK 2.6%
* Tower TWR 11.6%
* Total -7.5%

Forsyth Barr
* Auckland Airport AIA 16.1%
* Contact Energy CEN 12.3%
* PGG Wrightson PGW -20.0%
* GPG GPG -3.5%
* Delegat's DGL -19.8%
* Total -3.0%

McDouall Stuart
* NZ Oil & Gas NZO -44.1%
* Pike River Coal* PRC -77.5%
* Ryman Healthcare RYM 11.0%
* Michael Hill Jeweller MHI 36.5%
* Diligent DIL 93.5%
* Total 3.9%

FIVE YEAR AVERAGE

First NZ Capital
* Amount returned from $10,000 investment: $22,928
* Total Return: 129.3%

Craigs Investment Partners
* Amount returned from $10,000 investment: $16,029
* Total Return: 60.3%

Goldman Sachs JBWere
* Amount returned from $10,000 investment: $15,536
* Total Return: 55.4%

ASB Securities
* Amount returned from $10,000 investment: $10,912
* Total Return: 9.1%

McDouall Stuart
* Amount returned from $10,000 investment: $10,817
* Total Return: 8.2%

Hamilton Hindin Greene
* Amount returned from $10,000 investment: $10,224
* Total Return: 2.2%

Forsyth Barr
* Amount returned from $10,000 investment: $9,288
* Total Return: -7.1%

NZX50
* Amount returned from $10,000 investment: $9,975
* Total Return: -0.2%

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. UBS and Citigroup are obvious omissions. Finally, past performance is no guarantee of future performance.