Business editor Dene Mackenzie reviews the top share picks from brokers and analysts regularly quoted in the Otago Daily Times.
The NZX is expected to deliver returns more modest than seen in recent years and the forecast 9.5% growth is likely to be split equally between capital growth and income, Forsyth Barr broker Suzanne Kinnaird says.
As growth was expected to be delivered from earnings, Forsyth Barr had analysed full-year 2016-18 earnings per share (eps) growth.
While eps growth averaged 7%, 40% of constituents delivered low single-digit growth.
‘‘We believe more value resides in the 35% expected to deliver 10%-plus eps growth.''
Forsyth Barr's top picks for 2016 were based towards growth ideas and included CBL, Evolve Education, and Ryman Healthcare, she said.
CBL provided exposure to international earnings, growth and high return on equity. Earnings continued to be upgraded as it utilised its surplus capital and grew into additional niches.
Evolve offered value but positive earnings momentum was likely as further early childhood centres were acquired. Up to 30% a year were manageable and that was likely to be earnings-accretive.
Ryman Healthcare was a proven performer and Australia was viewed as providing the next step change in earnings potential, Ms Kinnaird said.
The stock picks for the year had been divided into ‘‘three buckets'' of growth, yield and value.
In each category, the selections utilised total return expectations but Forsyth Barr had been mindful of downside risks from both macro and micro issues.
The economic backdrop continued to be supported by construction and housing activity, she said.
Positive migration and wealth impacts from higher house prices continued to help consumer and business confidence and were reflected in positive retail sales and improving credit growth.
However, employment growth slipped in the third quarter of last year and the trade balance had deteriorated.
El Nino conditions were also expected to be negative for the agricultural sector and the South Island was already feeling the impact of drier conditions.
Further cuts in the New Zealand official cash rate and increases in the US Federal Reserve funding rate would offset some near-term pressures but earnings growth was forecast to moderate over the next three years, Ms Kinnaird said.
‘‘In a market less likely to be driven by lower interest rates, earnings growth and expectations beyond 2016 are expected to be increasingly important for capital growth. Our selection of growth companies all offer double-digit earnings growth and trade at discounts to our valuations.''
Low yield had been in favour and progressively lower bond yields were increasing the relative attractiveness of dividend yields versus traditional income assets, she said.
‘‘We believe bond rates have already bottomed, with higher headline inflation expected to reappear as the impact of last year's oil price falls roll out of comparative periods. We also expect corporate bond spreads to expand and follow international trends.''
Forsyth Barr's picks among higher-yielding companies again concentrated on protecting against downside risks. The picks provided both yield and growth potential, Ms Kinnaird said.
Restaurant Brands provided an above-average gross yield but also exposure to ongoing growth through store expansion and rising category spending. Growth expectations were double-digit over the next two years.
Electricity generators Meridian Energy and Genesis offered near double-digit eps growth and upside options should carbon prices increase.
All of the value selections - Arvida, Evo and Michael Hill International - were expected to deliver on earnings expectations, she said.
For Arvida, significant upside existed, as it established development credentials.
Evo forecasts assumed only minimal growth, despite significant free cash flow from being retained to drive growth.
Michael Hill International had delivered operationally and even Australian operations were improving. Growth options were seen in further Canadian and Emma & Roe expansion, something not being fully appreciated by the market, she said.
The three buckets
Growth: CBL, Mainfreight, Ryman
Yield: Genesis Energy, Meridian Energy, Restaurant Brands
Value: Arvida, Evolve Education, Michael Hill International
Craigs Investment Partners broker Chris Timms has gone with a wide variety of stock picks for the coming year.
Five New Zealand stocks
Meridian Energy ($2.16 target share price, 9.1% gross yield): Meridian has the highest-quality assets and a strong earnings growth profile over the near term.
Ebos ($14.07, 4.3%): Ebos is best in class at healthcare logistics and has a highly regarded management team. Ebos will gain share in Australia and continue to execute accretive acquisitions to the benefit of shareholders.
Z Energy ($6.42, 5.8%): The Commerce Commission is expected to approve Z Energy's acquisition of Chevron NZ and the share price will increase as a result. Oil prices are expected to remain low for some time and Z will be a beneficiary.
F&P Healthcare ($7.94, 3%): Products are gaining share in a large and rapidly growing market. The company is a major beneficiary of a weaker New Zealand dollar, with currency hedges beginning to roll off.
Port of Tauranga ($18.56, 4.1%): Port of Tauranga is well placed to benefit from long-term growth in the New Zealand economy. It is a well-managed company with a hub-port strategy that is beginning to deliver benefits.
Five Australian stocks
Commonwealth Bank of Australia ($A77.84, 5.4%): The Australian banks are trading at below-average multiples because of large capital raisings. This is a good entry point for Commonwealth Bank, the highest-quality domestic franchise in Australia.
AMP ($A5.74, 5.2%): AMP is experiencing good momentum across its business units, which is driving high earnings growth. The company is also well capitalised, with the potential for a capital return to shareholders in late 2016.
CSL ($A96.44, 1.9%): CSL has a strong product-development plan to provide future earnings growth. It operates in the defensive healthcare market, delivering strong cash flows and return on investment.
APA Group ($A8.96, 4.4%): The company has high-quality defensive assets providing strong cash flows and steadily increasing distributions. It is leveraged to the long-term structural growth in Australian gas demand.
Brambles ($A10.63, 2.7%): Management has delivered strong revenue growth despite sluggish conditions and Craigs expects this to continue. The company's container business and additional value-add services provide promising growth opportunities.
Five global stocks
Bunzi (£18.78, 2%): Bunzi offers investors a rare combination of stable cash-flow generation and a high-return growth opportunity. Compounding strong cash generation and high returns on invested capital is a recipe for long-run outperformance.
Johnson & Johnson ($US102, 3%): An attractive valuation and broad exposure to the healthcare sector makes the Johnson & Johnson one of Craigs' preferred direct equities within its total company coverage.
Southern Company ($US44.45, 5%): Southern Company has stable predictable cash flows, a 5% dividend yield and a strong history of dividend growth. With construction risk significantly reduced, Southern is well on its way to rerating back to the premium valuation it once commanded in the sector.
Republic Services ($US44.08, 2.7%): The company's results continue to stand out against its industrial peers and the shares are expected to continue to outperform the broader market. Despite solid growth and earnings visibility, the company does not trade at a premium to its historic valuation multiples.
Wells Fargo ($US55.67, 2.8%): The outlook for the US banking sector remains favourable. Wells Fargo has a more stable business model than its competitors and best-in-class returns on equity.
