Share Investor: Share Investor's 2011 Stock Picks

Originally posted 17 Dec 2010

Share Investor's 2012 Stock Picks

It is that time of the year, to pick stocks for 2011 and time for my stock picking monkey to come out of a self imposed 12 months hiatus for another stab at the stockmarket pages.

It is the 4th edition this year and once again impacted by looking after my 16 month old girl - she had no direct say in what the stock picking monkey chose for 2011 but will be encouraged to throw a dart or two at the end of 2011.

In the face of a continued global recession, an uncertain economic future that had a big impact at the end of 2009 and continues today 2011 might be be harder to pick than 2010.

2010 was a much better year for stocks than 2009, with stock prices overall coming well off 2009 lows.

Please keep in mind dear readers that the picks are my own and they reflect my investment philosophy and not necessarily anyone else's.

My picks are based on a long-term view, regardless of the current short to medium term market turmoil and economic uncertainty.

NB: Since I think most of my portfolio consist of the best stocks on the New Zealand market, I found it difficult to pick stocks outside my realm of self interest.

Share Investor's 2011 Stock Picks

Picks from the NZX

Fisher & Paykel Healthcare
[FPH.NZX]

I will kick off my picks with a company that I still consider will be one of the big successes of the next 5-10 years and one I included in the 2008, 2009 & 2010 Share Investor stock picks, Fisher and Paykel Healthcare, the health care products provider.

I had it as a pick for 2010 and it is down around 20c from this time in 2010, so that makes it a better pick than last year considering its good long term prospects.

Company forecasts for the 2011 year are understandably sketchy because of the US dollar volatility but US revenues are set to grow significantly, as they have done for the past decade.

Any significant movement in the value of the NZ dollar means a substantial rise or fall in profit, as the bulk of company revenues are in the US dollar and 2011 half year profit results have been impacted significantly from the weakening US dollar.

Fisher's profits are largely immune from the current market turmoil as buyers simply have to have the products that the health care company makes regardless of a global recession.

A future global player in the sector they operate in.

Fisher & Paykel Heathcare @ Share Investor

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Disc I own FPH shares in the Share Investor Portfolio

Xero Ltd
[XRO.NZX]

Currently Xero Ltd, the online accounting software company, is a niche player in an industry dominated by global players like Quicken and MYOB and it increased its customer base significantly in 2010 and looks set to build on 2010's gains.

It is presently building its customer base to get "critical mass".

The buzz in the tech industry surrounding Xero is reflected in the amount of support the company has from insiders and it could be well a big player in time to come. The company has had some significant financial backers from those who know Xero well but Mums and Dads are still largely absent from the shareholder register.

It has yet to make any money but is expected to break even in the latter half of 2011 and should start to see some profit in the next few years.

XRO is a little riskier than most investments and the share price has increased well over the latter part of 2010 so that risk increases slightly.

If the hype is only partially matched by concrete results this share will take off.

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Sky City Entertainment Group Ltd
[SKC.NZX]

Not a stock I expected to pick after being a big critic of it over the last few years. Charlies Group Ltd has managed to wangle its way into my affections for 2011. It did this simply by finally showing a profit for the full year to June 2010. Previously to this it had been mired in mounting losses and a number of capital raisings but their strategy of growing the business over the last 3-4 years has paid off. They recently expanded in a vast push across OZ into over 750 Coles Supermarkets and this gives them the leverage there to increase sales manifold times over 2010 levels.

The share price, at 17.5c, is almost 3x more than it was at its lowest level in 2010 but prospects for the company look good due to Australia.

Buy on thinly traded weakness.

Charlies Group @ Share Investor

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Michael Hill International Ltd
[MHI.NZX]

Michael Hill International has had a tough last couple of years but the most recent result has been pleasing to say the least.

It has largely put the cost of its expansion in North America behind it by closing a number of stores and consolidating in Chicago and seeing how things go there before further mainland USA expansion.

It has done reasonably well in its main markets in Australasia but Canada remains weak.

The share price has gained more than 30% since I picked it in the 2010 Share Investor Stock Picks but MHI still remains a good long term investment with good growth potential and business fundamentals.

Disc I own MHI shares in the Share Investor Portfolio

Michael Hill International @ Share Investor

New Zealand Refining Ltd
[NZR.NZX]

With low refining rates, massive capital expenditure and plant shutdowns largely behind them and a rising global oil prices, 2011 looks to be a resurgent year for New Zealand Refining Ltd.

Those higher oil prices will see this stock rise and it has already and the oil price rise has been a significant one. It has been mainly due to a very cold Northern Winter bumping up all sorts of petrochemical products so it is unclear just how sustainable the oil price rise will be. Having said that the recent rise is bound to gain some traction even when the Northern ice melts away and 2011 rolls along.

Look for an increased dividend in 2011 as profit increases that will underpin a good share price rise from current levels.

NZR @ Share Investor

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New Zealand Oil & Gas Ltd
[NZO.NZX]

Apart from its 29% holding in the now insolvent Pike River Coal Ltd [PRC.NZX] and the financial fallout from that, NZ Oil & Gas Ltd has had a reasonable year considering the overall lowish global oil prices for 2010.

The Pike River Coal Mine disaster has provided an opportunity for investors to get this stock relatively cheap considering it has a reasonable volume of oil and gas left to pull out of the ground and several drilling prospects on the boil.

The fact that global oil prices per barrel are rising and should pass US$100 will give Oil & Gas the impetus to get more out of the ground and return some higher margins for their products.

The only drawback is a relatively high Kiwi/US dollar cross but the Kiwi seems to have peaked out late 2010 as the dire state of our economy and deficits become clearer.

Watch for a good bounce in profit for 2011 as a result of these favourable key points come together.

NZ Oil & Gas @ Share Investor

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Discuss NZO @ Share Investor Forum
Download NZO Company Reports

Other Notable Quotables

NZX

Kathmandu Holdings Ltd [KMD.NZX] A retailer currently under pressure. Value below NZ$1.50.

Port of Tauranga Ltd [POT.NZ] New Zealand's leading port company with good upside on increased exports and a good dividend. Best managed port in New Zealand with the best long term prospects.

Auckland International Airport Ltd [AIA.NZX] A good monopoly at historically cheap prices, doing marginally better in 2010 and set to pick up profit in 2011.

Telecom NZ Ltd [TEL.NZX] Value in the company as a hedge against investment inflation. Dividends are over 10% net PA at current share prices (low NZ$2.10 - 2.20 range) and stock worth buying at these low levels for the return and a possible recovery in share price due to its participation in the high speed fibre roll-out and subsequent business around that.

Fisher & Paykel Appliances Ltd [FPA.NZX] has an outside chance of coming right in 2011 if the housing market starts to show some growth and its relatively low share price is a good entry point for a company still in transition from a monopoly to a more competitive model of doing business.

ASX

Tatts Group Ltd [TTS.ASX]
Tabcorp Holdings Ltd [TAH.ASX]
Reef Casino Trust[RCT.ASX]

All Australian casino companies under pressure with sluggish returns and relatively low share prices and ripe for mergers and acquisitions. Possible suitor, Sky City Entertainment Group Ltd [SKC.NZX] that is doing well , has low debt levels and access to over a billion NZ dollars in borrowing facilities and could easily find more if needed.

Nasdaq

A pick from 2010, Yum ! Brands Inc [YUM.NASDAQ] A target of 10% sales growth for 2010-2011 after a 15% plus profit growth in 2010 and more good growth to come from China & India make this company a finger Lickin proposition.

Conclusion & Outlook for 2011

2011 may well be a year of marking time for global stockmarkets. As uncertainty surrounds the fragile state of many economies. The big gains made on stockmarkets in 2010 could materialize for some as nervousness over the aforementioned leaves them to take cash off the table. I think there is more bad news in relation to the global economy to come, but that is only my opinion.

That aside if you can, some listed companies have done well in 2010 and will continue to do so in 2011 but others will find the going tough as cash flow dries up, debt mounts and interest rates bite.

If there is no upturn in the economy, stockmarket share price weakness will have me poised to buy further shares in some of the companies I own in the Share Investor Portfolio with surplus cash of over $16,000.00 in dividends rather than with borrowed funds. I am looking at buying more Fisher and Paykel Healthcare Ltd [FPH.NZX] shares should the share price fall and The Warehouse Group Ltd [WHS.NZX] is on my radar again after a recent share price correction.

Remember, the stocks I have picked above are based on my investment criteria and may not fit yours and of course you could have a different opinion. I would love to hear your opinion and any picks you may have.

Have a look at what I have to say, take it on board or not and then do your own research to see if you might agree with me.

Lastly, I wish you all good luck and a prosperous 2011, we could all use it!

**Just an added footnote. Please feel free to post your own stock picks for 2011. The only requirement is that you say why and declare any financial interest. Post them below at the bottom of this piece or click here.

Disc I own FPH, WHS, SKC, MHI, AIA, shares in the Share Investor Portfolio.

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10 comments:

AnonymousDecember 17, 2010 at 3:07 AM
You still won't consider BH on the NYSE. ....
Share InvestorDecember 17, 2010 at 8:15 AM
I dont really know it anon, but I do know you have pointed it out to me before.

Seems to have done well share price wise over the last year but is close to all time highs in terms of share price:

http://finance.yahoo.com/echarts?s=BH+Interactive#chart1:symbol=bh;range=my;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined

Is it not overvalued?
SBTradesDecember 17, 2010 at 7:47 PM
Hey Darren, Anon was me. I was trying to submit the comment on the "world's longest ever blog post", and the iPad was not handling that very well on my slow wifi connection.

Well it might be a bit overvalued, but there is still plenty of room for growth. So I am willing to buy more on any pullbacks or dips because of the room for growth and the management behind the stock. I suggested this "restaurant" stock to you instead or in addition to YUM.

I think this article says it all.

http://www.rttnews.com/Content/QuickFacts.aspx?Node=B1&Id=1504218
AnonymousDecember 18, 2010 at 5:56 PM
Surprised you didn't pick Mainfreight this year Darren. It has done well in 2010
Share InvestorDecember 19, 2010 at 7:16 PM
This comment has been removed by the author.
Share InvestorDecember 19, 2010 at 7:18 PM
SB, Hey long winded is my middle name.

Mainfreight you might want to look at SB. It is possibly overvalued at present, which is why I didn't pick it for 2011 Anon, but it is in my not so humble opinion, THE best managed company on the NZX.

It has great long term prospects because of its global growth ambitions and I picked 1500 up at the end of 2009 for $4.20 after spending 8 bucks and $7.96 on my first entry into MFT.

Interestingly it is one of a few NZX stocks (RBD is another one) to get back near or above its stock highs since the October 2008 crash.
AnonymousMay 8, 2011 at 1:27 PM
Hi Darren
Do you think NZO is still undervalued after the Pike River over reaction to the price?
Looks like NZO has covered this loss yet may well still get something back and meanwhile this company still brings in buckets of cash.
Share InvestorMay 8, 2011 at 4:01 PM
Hi Anon, it depends how much oil they can pump from their wells, at what price, for how long and if they are successful at future exploration. Their Pike River asset could bring in some extra cash when sold but it wont be as much as what they spent on developing it. The BIG question is how do you see the price of oil in the medium to long term and what our exchange rate will be.
AnonymousDecember 13, 2011 at 8:41 PM
Hi Darren,

Just had a read of your 2012 stock picks. Interesting read and thanks.
I notice SKC makes a large majority of your portfolio. Do you have any concerns on their debt levels? (although these have come down a lot in recent years). The revenue growth on SKC also appears a little slow over the last 5 or so years, which makes it look more like an income stock rather than a growth stock?What do you think?
Also if you had a slightly longer list would you include POT and RYM?
Share InvestorDecember 13, 2011 at 11:25 PM
Hi Anon, SKC originally was the ONLY stock in the portfolio back in 2002. Debt levels were reasonably addressed with a capital raising and debt paydown in 2009 and would only be a concern if the business started to shrink in revenue. They do have access though to a creditline of more than 1 billion which is currently not drawn down.

Revenue growth has been slow since smoking was banned and there were limits placed on poker machines but revenue has climbed slowly over the last 2 years and exceptionally over the last 4 months.

Morrison has been good for the company, I like him (he is an accountant and he is only interested in the bottomline)and have met him several times for interviews and he impresses me as a man who knows what he is doing with this business.

RYM is definitely a good long term buy but could be a little cheaper and POT is also a good long-term buy but WAY overpriced and will come back in 2012. I would have picked both of these stocks had the share price been lower but both are near their historical highs.

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