OUR FIVE PICKS FOR 2020
Mark Lister, 6 January 2020
For some years, the New Zealand Herald has asked the major broking and wealth management 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.
We will outline the five stocks we landed on for 2020. We have no misgivings about picking four of last year’s stocks again. We are long-term investors and some of our best ideas are ones we have supported for many years. Companies which were close to making the cut also deserve a notable mention. Those which were part of the debate included Fisher & Paykel Healthcare, Gentrack, Restaurant Brands and Ryman Healthcare.
But first, how did we do last year?
Our five companies for 2019 were:
- a2 Milk (+42.7%)
- EBOS Group (+14.9%)
- Fisher & Paykel Healthcare (+84.9%)
- Mainfreight (+41.3%)
- Meridian Energy (+54.8%)
These all performed very well, with four out of five beating the NZX 50 index comfortably.
Of the eight participants in 2019, we came in second place with a gain of 47.7%. This compares very well with the 31.6% return for the NZX 50 during the same period, which in itself was nothing short of spectacular.
Our approach doesn’t lend itself to coming first in a contest like this, as minimising volatility, focusing on sustainable (and growing) dividends, and sticking to quality are key tenets of our investment philosophy. We have full confidence in this approach as a long-term generator of wealth, as evidenced by our track record. However, to come out on top over just 12 months one often needs to take on more risk than we are comfortable doing, and to be of a short-term trading mindset. Still, it was pleasing to see our five stocks all perform well and for us to have chosen the top two NZX 50 performers (Fisher & Paykel Healthcare and Meridian Energy) of the year.
Looking ahead to 2020
Financial markets are facing a tug of war between weaker economic growth and a highly accommodative policy backdrop from central banks. Two important elections are looming in the latter months of the year (in the US and here in New Zealand) and these will have significant relevance for New Zealand investors. Both of these could be close, adding to the uncertain backdrop over the coming 12 months.
On a brighter note, we think the New Zealand economy is in reasonable shape. Some tailwinds have eased, although high commodity prices, low unemployment and steady migration are providing support. In addition, interest rates are exceptionally low, government spending is likely to provide further stimulus and business confidence has rebounded a little.
Our recommendation is to position portfolios defensively and expect more volatility. We suggest sticking to high-quality ‘best of breed’ businesses that have strong competitive advantages, pricing power and growth options.
Our five picks for 2020
The a2 Milk Company (ATM)
ATM had a volatile year in 2019, with unexpected changes in the management team just one of the challenges the company faced. However, the company still managed to grow its profits by 47 per cent and finish the year with a significant amount of cash on the balance sheet. Risks around Chinese sales channels remain, while competition is also increasing. However, we remain confident about the company's future, particularly with regard to infant formula products. While ATM is an above average proposition in terms of risk, the growth opportunity ahead more than offsets this.
EBOS Group (EBO)
We like the healthcare sector, given the backdrop of an aging population and the resilience of healthcare products and services regardless of where we are in the economic cycle. On the back of sound management and astute acquisitions, EBO has been a steady, reliable performer that has generated very strong long-term returns for investors. We expect that to continue, with EBOS likely to seeing ongoing benefits from being the largest player in the sector.
FRE is a well-managed company with a quality franchise that is difficult for competitors to easily replicate. FRE’s service is embedded in the supply chain of its customers and this has enabled it to develop strong customer relationships and brand loyalty over a long period. A large portion of FRE’s business is exposed to the domestic economic cycle. While a number of headwinds exist, we suspect the local economy could perform better than many expect in 2020. In the longer-term, growth in the domestic market should be supported by the structural tailwind of growth in e-commerce and online shopping.
MFT rarely disappoints, and the company deserves its tag as a genuine blue chip stock on the local market. It is a high quality business 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. The company 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. The company has strong pricing power and an element of inflation protection, which means it can deal with cost pressures better than most. The dividend yield of more than five per cent is highly attractive, and MEL offers the potential for long-term earnings growth.