Analysts warn of over-valued stocks

Morningstar analysts say the New Zealand sharemarket, which rose 24% last year, has reached “fall value” and offers few bargains for investors.

The one exception is Chorus, which was the second worst performer among NZX 50 stocks last year with a gain of just 1%.

Chorus shares plummeted 14% after the Commerce Commission issued a draft opinion that would slash copper wire broadband rates, substantially cut profits and reduce ultra-fast broadband takeup.

Morningstar warns Investors that “regulatory changes create a high uncertainty environment” but adds that as the methodology of the decision is suspect, not to mention Prime Minister John Key’s concerns, that a better outcome for Chorus is likely.

Morningstar concludes that New Zealand’s best performing yield stocks – Telecom, SkyCity, The Warehouse and F&P Healthcare – are worthy of retention in diversified portfolios.

Looking at sectors, Morningstar says telecommunications is the cheapest while healthcare and consumer stocks are the most expensive.

In healthcare, it says Ryman is expected to double its profit in the next five years, F&P Healthcare will have double-digit growth in the medium term, and Ebos has the ability to survive the “whims and fancies” of the district health boards and funding agencies.

In the consumer services sector, Morningstar’s pick is SkyCity, which is ‘bucking the trend [of static consumer spending] by winning market share from pubs and clubs.”

Another pick is Nuplex, which is expected to deliver growth over the longer term in Asia, Europe and the Americas, through capacity expansion and productive innovation.

However, the short-term outlook is less predicatble and could mean a stagnant share price in 2013 due to its dependence on the manufacturing and construction end markets.

Among Morningstar’s least preferred stocks are Briscoe, Fletcher Building, Ryman and Trade Me, all of which it considers excellent companies but that they are fully or over-valued. 

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5 Comments & Questions

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Same Morningstar which recommended against Fonterra shares? They have only put on 33% gain.

Same Morningstar which could not get a handle on the finance company sector?

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"Fall" value or "Full" Value?

Surprised they didn't mention Xero.

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I think in the case of Xero it is "fool" value.

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I guess it depends if you are in the market for short-term or long-term reasons? Most of the commentary seems to focus on bargains and short-term gains....

No students of Warren Buffet anywhere?

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Kiwisaver is goin to end up a disaster for this country. Self-interested fund managers would rather invest in our market than diversify into overseas markets where they would have to pay fees to offshore managers. We are going to get a self-perpetuating equities bubble that will, of course, pop one day.

Our market is simply too small to accommodate the influx of Kiwisaver money. Of course, by pumping up the price of equities it makes their performance look great and maybe we will have an overvalued exchange for decades.

Dividend yields will fall and fall. No one will care as stock prices go up and up - fundamentals won't matter any more - then it will all go boom.

Shame on you NZ fund managers that see this problem but are blinded by the $$$s and will retire with millions when it all goes pear-shaped. Someone else's problem, right?

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