IT, construction sectors and small caps highlighted as top stock picks for 2000
The stock market should break through the 20,000 mark during the first quarter this year as foreign investors pile back into Polish stocks after the holidays and in the wake of the non-event that was Y2K, market analysts said last week.
Analysts highlighted the construction and small-cap production sectors here as particularly poised for strong returns along with information technology (IT) stocks following the global trend.
"We expect the WIG index will well exceed 20,000 in the first quarter," perhaps surpassing its all-time high of 20,760 points set in March 1994, said Pawel Zach, an analyst at Citibank (Poland).
In the last days of trading in 1999, the all-share WIG index rose to a year high of 18,370 Dec. 27. Although the market index slipped to 18,083.60 on Dec. 29, it was up 41% year on year with about one-third of the rise coming in December.
Pension fund investments on the domestic front, as well as the influence of buoyant sentiments on world equity markets translated into heavy trading on the Warsaw Stock Exchange (WSE), Zach said. Pension funds will play an even greater role in 2000 with their monthly zl. 100 million ($24.27 million) injection in domestic stocks expected to reach the zl. 500 million ($121.36 million) level by year-end, Zach said.
"It will push both traded volume and prices up in 2000," said Pawel Puchalski, an analyst at Dom Inwestycyjny BRE Banku. "There is a long-term upward trend thanks to the money invested on the WSE by the pension funds."
The WIG may cool down later in the year, due to its nature as a volatile, emerging market, Zach said. Near-term highs will have to level out to encourage foreigners to return to Poland in earnest, Zach said. This may happen in the next few weeks, he said.
"Foreign investors don't like to come when the market is getting new highs. The risk is higher than when the market is stable," he said. "Following this accumulation the market could start to rise again."
Right now, the most lucrative stocks promise to be those in the IT sector, which includes firms such as Optimus, ComputerLand, and Softbank as well as Prokom, the last of which, Zach believes, may be undervalued. With the Y2K scare past, the sector can be expected to outperform the WIG and its appeal further buoyed by sector performance in other markets. "It's the most attractive," Zach said. "And it's the sector where you could expect growth to exceed other sectors."
Foreign investors will be interested in companies such as media heavyweight Agora, which late last year announced its intention to enter the IT sector, Puchalski said. In December alone, Agora rose 37.5%, with the increase mainly due to the announcement, he said.
And while blue-chip, WIG-20 IT stocks and those in the index's top-50 companies can expect to attract further investment, some small-cap stocks also bear watching, analysts said. Those include small to medium-sized production companies such as Lentex, Irena, Jelfa and Polfa-Kutno. "The year 2000 is the right year for them," Puchalski said. "(They) are showing great growth potential."
Despite rapid increases in share prices last December for example, Lentex and Irena both rose 32% price to earnings ratios (p/e) remained low, and will dip even lower on the basis of profit forecasts, Puchalski said. In addition, Polfa-Kutno will likely experience a drop in p/e of 11.9, based on trailing 1999 returns and its December share price of zl. 72.5, to 6.9 based on a projected, 80% increase in earnings this year. Multiples for Jelfa will drop from a p/e of 16.8 based on a zl. 35.1 share price, to 11.1 in 2000 as profit is forecast to rise 50% this year. The aggregate p/e for companies traded on the WSE is currently above 20.
"With the economic recovery, who could do better than well-managed small companies, fully controlled by their owners (rather) than huge mastodons that still employ too many people and can't do anything," Zach said.
And 2000 also looks to be a promising year for construction-sector stocks. Puchalski said his tip for the year was Budimex, which carries a long and short-term "buy" recommendation from Dom Inwestycyjny BRE Banku. The firm recently purchased 13% in Mostostal Krakow, bringing its holding in the builder up to around 47%, and "Budimex for sure has much better assets than its main rival Exbud," Puchalski said.
