INSIGHTS

OUR FIVE PICKS FOR 2019

Mark Lister, 7 January 2019

For some years, the New Zealand Herald has asked the major broking firms to nominate five companies on the NZX they think will do well in the year ahead. Astute investors will appreciate that any sensibly constructed portfolio will contain more than five stocks, and will not be limited to one asset class or region. Nonetheless, the tradition is an interesting way to gain some insights into what investment strategy teams are expecting in the year ahead.

But first, how did we do last year?

Our five companies were:

  1. a2 Milk (+38.5%)
  2. Mainfreight (+24.7%)
  3. Restaurant Brands (+23.5%)
  4. Tourism Holdings (-4.0%)
  5. Meridian Energy (+23.4%)

Of the seven participants in 2018, we came in second place with a respectable overall gain of 21.2%. This compares well with the 4.3% return for the NZX 50 during the same period (which was from December 18 2017 to December 14 2018). Our conservative, low risk approach rarely lends itself to coming first in a contest like this. To achieve that, you often need to take on a little more risk than we are comfortable doing. We make no apologies for that, as minimising volatility and sticking to quality are key tenets of our investment philosophy.

Pleasingly, only one of our five stocks suffered a negative return (and that was only a modest decline), a better hit rate than the index, where 32 of 50 stocks produced a positive return over the 12-months. In addition, four of our picks were in the top ten NZX 50 best performers over the period.

Looking ahead to 2019

Similar to 2018, next year could be a difficult one for investors to navigate. Markets will continue to grapple with slowing economic growth, a less supportive backdrop from global central banks, and geopolitical issues such as the trade tensions between the US and China. The domestic economy is in good shape, although we expect the pace of growth to slow as the tailwinds of recent years lose steam. This all points to ongoing volatility and more modest returns from most asset classes.

Markets have sold off substantially since late September, and it is unclear how long the negative sentiment will continue. While further volatility (and potentially more downside) is likely, a bright side is that valuations look much more appealing that they did three months ago.

Opportunities still exist against this backdrop, but investors need to be more selective. We are focusing on companies with a clear growth strategy, the defensiveness to withstand a slower economy, pricing power, an element of international exposure, and sustainable dividend yields. We had no misgivings about picking three of last years stocks again for 2019. We are long-term investors, and some of our best ideas are those we have supported for many years.

Our five picks for 2019

PICKS FOR 2019

 

The a2 Milk Company (ATM)
This is probably the highest risk proposition amongst our picks for, especially on the back of a few years of exceptional share price gains. ATM was the second best NZX 50 performer in 2018, bettered only by Trade Me. Aside from the stunning share price performance we have seen recently, there is also risk around Chinese sales channels, regulation and competition. However, the company has made excellent progress during the last year or two, particularly with its infant formula products, and we remain positive on the long-term growth prospects for ATM.

Mainfreight (MFT)
MFT rarely disappoints, and deserves its tag as a genuine blue chip stock on the local market. It is a high quality company with strong management and an excellent track record of earnings growth and shareholder returns. MFT has a diversified global footprint, with three quarters of revenues coming from offshore. MFT offers attractive growth options, an international exposure and the potential to benefit from the growing complexity in global supply chain management and e-commerce.

Meridian Energy (MEL)
MEL is New Zealand’s largest electricity generator and has a 100% renewable generation platform. MEL has very high quality assets, and is likely to be resilient during challenging economic conditions. This company has pricing power and an element of inflation protection, which makes the highly attractive gross dividend yield of more than 7.5% sustainable with steady prospects for growth.

EBOS Group (EBO)
We like the healthcare sector generally, given the backdrop of an aging population and the resilience of healthcare products and services regardless of where we are in the economic cycle. Over the last 12 years, EBO has become the largest independent distributor of pharmaceutical and veterinary products in Australasia. Two acquisitions - Masterpet (a distributor of animal care products) in 2011 and Symbion Health (Australia’s largest pharmaceutical distributor) in 2013 were of sufficient scale that they have substantially changed the nature of the business. On the back of sound management and astute acquisitions, EBO has been a steady, reliable performer that has generated very strong long-term returns to investors.

Fisher & Paykel Healthcare (FPH)
FPH’s high-value niche products hold strong positions in a number of international medical device markets, which drives high levels of profitability and impressive returns on investment. It has excellent long-term prospects on the back of global demographic tailwinds and a growing market. It is a world-class business with globally diversified operations. The company would be insulated from a slowdown in any specific region, and is a beneficiary of a weaker NZ dollar (should we see our currency come under pressure in a more volatile environment.