In a NZ Herald column this morning Mark Lister from Craigs Investment Partners discusses the virtues or otherwise of new investors buying "penny stocks" and the quality of the businesses that might be behind the stock price and as thinly on the ground as they are on the NZX, that you must look to the fundamentals of the business.
Mark indicates some qualities he would like to see in a business before investing:
1: A business without too much competition.
2: Good balance sheet with room for debt.
3: A track record of good and increasing earnings.
4: Generally defensive in nature.
5: Good management.
I agree with these 5 points but must add that I see good management as the first tick before investing, well above the other point Mark made.
I must also note buying cheap face value stocks is not always an indication that the company is a dog - it maybe just suffering a temporary dip in performance for whatever reason - but it is more often than not a good indicator.
With this in mind Mark has picked 11 stocks that fit his criteria and that he has invested his clients in and I will comment below on these picks:
The following is a list of stocks by the returns they have delivered over the past decade, using figures that we calculate ourselves for the 10 years ended March 31, 2011. These figures take into account dividends and capital growth in share prices and are adjusted for share splits, rights issues and so on. This list is not exhaustive and is obviously limited by space.
This list is not any sort of quality ranking, but it does show how well some of our companies have done over the past decade.
Freight-forwarding company Mainfreight Ltd [MFT.NZX] tops the list. It has returned 29 per cent a year over the decade, or a total return of 1216 per cent. In 2003 Mainfreight published a book on its first 25 years. It was a great read and it talked a lot about the 100-year vision for the company. In the years since, it has made rapid progress, cementing its local market position and expanding its operations around the world. Company leadership is top-flight and it has a strong focus on the long term.
TrustPower Ltd [TPW.NZX] comes next with a 10-year gain of 22.6 per cent a year. The Tauranga-based generator and retailer of electricity has carved out a defensive niche in it sector. Its strong renewables focus has been a point of difference, as has its ability to manage its retail operation better than any rival while maintaining its premium customer service offering.
Ryman Healthcare Ltd [RYM.NZX] is not far behind with 22.2 per cent a year. One of our market's biggest success stories, Ryman is a leading company in the aged care sector. It recently announced it will be expanding into Australia and locally will be increasing its build rate from 450 to 550 units and beds a year to meet rising demand for its services. Ryman has also grown its dividend handsomely. Investors astute enough to buy Ryman shares 10 years ago are enjoying an income from dividends of over 18 per cent a year on their original cost.
There aren't many big development or infrastructure projects in this country that happen without Fletcher Building Ltd [FBU.NZX]. This strong market share in construction and building materials has helped it deliver a return to shareholders of 20.7 per cent since 2001. The company continues to expand overseas.
A company that many people perhaps will not have heard of is Ebos Ltd [EBO.NZX], a healthcare distributor. It has returned 17.1 per cent a year and is another stock that has delivered strong dividend growth. It has a strong market position here and is expanding in Australia.
Port of Tauranga Ltd [POT.NZX] has returned 15.5 per cent a year and continues to go from strength to strength. Strong demand for logs from Asia is boosting export volumes and revenues, but this company is much more than a short-term story. It has built a strategically important position, has valuable land assets, good transport links and room to grow.
Auckland International Airport Ltd [AIA.NZX] comes next with a return of 12.6 per cent a year. The airport is New Zealand's key contact point with the outside world. Management continues its focus on developing the airport's property precinct and improving the overall service offering and efficiency.
Carpet maker Cavalier Corp Ltd [CAV.NZX] comes next with a return of 11.8 per cent a year. Cavalier clearly operates in a tough sector and faces strong competition, and has to cope with demand for its carpets moving up and down with the economic cycle. Despite all of this the company has done well and delivered excellent growth and dividends for shareholders.
Express package company Freightways Ltd [FRE.NZX] has delivered a solid 10.6 per cent a year over the decade. It is a well-managed company with strong brands such as New Zealand Couriers and Post Haste Couriers. It continues to expand its market position and has expanded into Australia in the information management sector.
Property for Industry Ltd [PFI.NZX] is one of the best-performed listed property vehicles with a return of 9.4 per cent a year. It has delivered consistent increases in its dividend over the years and has always impressed with its astute management of its portfolio of industrial properties.
No list of high-quality stocks in this country could exclude Fisher & Paykel Healthcare Ltd [FPH.NZX]. It produces world-class products such as heated humidification products including respiratory humidifiers, breathing circuits, infant resuscitators and infant warmers. It is a leader in products for the treatment of obstructive sleep apnoea. It has returned 7.9 per cent a year over the decade. Given 98 per cent of sales are overseas, the strong NZ dollar has impacted on results.
Now I haven't checked Mark's figures for accuracy but if you check below this post in the Long Term View series of posts you will find there are other stocks that have gleaned far higher returns than his picks, especially when you hold for greater than the 10 years he has covered.
I agree wholeheartedly with Marks first pick, it is the best managed company on the NZX, but he hasn't been critical of his other picks or pointed out that all of these companies have been impacted by the financial ups and downs of the last 2-3 years. Fletcher Building for example had a disastrous history through the 1990s and up to the point where Mark makes his calculations, the company they were before they became FBU almost went into receivership.
An essential point missing from Mark's stock picking criteria is timing of the investment. You must buy when the stock you are after is at a level where its fundamentals meet what current returns you are after and therefore what future returns you might get. There is no point buying what some might seem as good quality companies unless you include this as a feature in your picking.
Finally, it is great to see people like Mark putting their money where their mouth is and buying and disclosing what they are investing in on behalf of clients. It would be nice to see him disclose what he has in his own personal portfolio though.
Share Investor's Annual Stock Picks
Share Investor's 2011 Stock Picks: Looking Back
Share Investor's 2011 Stock Picks
Share Investor's 2010 Stock Picks
Share Investor's 2009 Stock Picks
Share Investor's 2008 Stock Picks
Brokers 2011 Stock Picks
Long Term View Series
ASB Capital Preference Shares (A)
ASB Capital Preference Shares (B)
Auckland International Airport
Air New Zealand
ANZ Banking Group Ltd
Briscoe Group Ltd
Cavalier Corporation Ltd
Contact Energy Ltd
Delegats Group Ltd
EBOS Group Ltd
Fletcher Building Ltd
Fisher & Paykel Appliances
Fisher & Paykel Healthcare
Goodman Fielder Ltd
Hallenstein Glasson Holdings Ltd
Hellaby Holdings Ltd
Kirkcaldie & Stains Ltd
Kiwi Income Property Trust Ltd
Michael Hill International Ltd
Mowbray Collectables Ltd
NZ Oil & Gas Ltd
New Zealand Refining Ltd
New Zealand Stock Exchange Ltd
Nuplex Industries Ltd
PGG Wrightson Ltd
Port Of Tauranga Ltd
Postie Plus Group Ltd
Pumpkin Patch Ltd
Restaurant Brands Ltd
Ryman Healthcare Ltd
Sealegs Corp Ltd
Scott Technology Ltd
Sky City Entertainment Group Ltd
Sky Network Television Ltd
Smiths City Group Ltd
Steel & Tube Ltd
Telecom NZ Ltd
Telstra Corp Ltd
Tourism Holdings Ltd
Turners Auctions Ltd
Turners & Growers Ltd
The Warehouse Group Ltd
Wakefield Health Ltd
Westpac Banking Group Ltd
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c Share Investor 2011