Picking a winner

The Warsaw Stock Exchange (WSE) hit new long-term lows in 2001 and lost 22% of its value. Some stocks plunged from high-flying blue chips to cast-offs worth mere grosze. But not all shares plummeted - many outperformed the market and a select few gained significantly in value. To help find the hidden gems of 2002, the Business Journal asked four leading analysts to pick the likely top performer for the first quarter of the year. We added one random person, quizzed on the street, to see if an amateur had as much insight as the experts. The Business Journal will hold the panel accountable each quarter - seeing who made the best and worst picks - and start the process again. The five stock picks in our first contest for Q1 2002 are KGHM Polska Miedź, Netia, Farmacol, Kredyt Bank and ING Bank Śląski. The experts explain their choices inside. KGHM a market gold standard Andrzej Knigawka, an equity analyst at ABN AMRO Securities, went for the copper and telecom conglomerate because the global demand for copper should rise in 2002 while the złoty should fall in value against the U.S. dollar, boosting KGHM's revenue from copper exports. "2001 produced the biggest drop in demand for copper in the last 20 years but this year we expect the demand to rise by some 5%," Knigawka said. "We believe that copper is now the most undervalued metal on global markets for non-ferrous metals." KGHM should perform better than the entire economy, Knigawka said, as the macroeconomic recession, which will last for at least another half year, will affect KGHM less than most other Polish companies. "66% of KGHM's revenue comes from exports, therefore its revenue and profit are more independent of the business situation in Poland," he said. With much of its revenue dollar denominated, the copper giant's success is closely geared to the strength of the U.S. currency, which, according to Knigawka, should soon gain against the złoty. "The złoty is overvalued and we expect a weakening of the currency, which will be another boost for KGHM," he said. KGHM's telecom assets - the company has a stake in mobile operator Polkomtel and is the sole owner of fixed-liner operator Telefonia Lokalna - also give sufficient reasons for optimism, according to Knigawka. "The results of Polkomtel are good and will stay good," he said, "and the fears over KGHM's problems with Telefonia Lokalna that spread on the market in the fourth quarter of 2001 were not in proportion to the scale of those problems." KGHM opened the quarter at zł. 13.05 per share. Netia shares calling A speculative stock - with wider price fluctuations than safer shares - can provide the biggest return over a short time period, according to Krzysztof Misiak, head of research at Dom Maklerski Bank Zachodni WBK. Poland's second largest fixed-line telephone operator Netia, whose shares plummeted from zł. 117 at its initial public offering in July 2000 to an all-time low of zł. 2.16 on Oct. 8, 2001, fits that bill. Investors turned their backs on Netia 2000's technology bubble burst and Netia's bold investment projects dragged it deep into debt and pushed the firm to the verge of bankruptcy. But now the likeliness of Netia's bankruptcy is decreasing and Misiak expects the company's share price to rise on the back of recent gains on the WSE. Sweden-based Telia, Netia's key shareholder, is likely to reach an agreement with bond holders on debt restructuring, he said, and chances that a so-called rescue issue of shares will succeed are rising. If these two factors work out, the company will be able to reduce its debt by repaying a part of it and by transforming some bonds into shares. Also on the plus side, Telia will probably continue to provide Netia with capital, Misiak said. Netia opened the quarter at zł. 4.70 per share. Farmacolcures the bear Dariusz Nawrot, head of research at Dom Maklerski PBK, picked the drug distributor Farmacol as most likely to outperform the market in the first three months of the year. "Farmacol is a defensive stock and such stocks perform well during economic slowdowns and recessions," Nawrot said. Nawrot said that despite the recent gains, on which the WSE rose significantly in early January, the market faces a few tough months ahead. "We expect the general sentiment on the WSE to worsen in the next couple of months ... so for that reason we think that defensive stocks will perform better than the market," he said. The drug industry is a traditional haven for investors during periods of economic recession as consumers hold off on durable goods purchases but continue to buy necessities, such as food and drugs. Nawrot said Farmacol's share price is attractive when compared to other companies in the industry. "Farmacol commands a good, second position on the pharmacy market and it stands a good chance to further strengthen this position," Farmacol opened the quarter at zł. 26.50 per share. Cashing on Kredyt Bank Tomasz Mazurczak, head of research at Dom Inwestycyjny BRE Banku, recommended Kredyt Bank, whose majority shareholder, Belgium-based KBC Bank, in December announced a buyout call for the Polish institution's remaining free float. The call ends on Jan. 31, but according to Mazurczak, few shareholders will be willing to sell their holdings at the zł. 18 price offered by KBC, and the stock will not only stay in public trading but its price is set to rise this quarter. "The bid for the remaining free float from the Belgian KBC Bank will fail, because the bidding price is too low," Mazurczak said. Mazurczak suggested a bank even though he didn't expect the sector to offer the highest yields on the market. But the low risk factor of banking stocks provides a strong guarantee of gains, he said. Mazurczak saw Kredyt Bank as the best pick among banking institutions as its price, unlike other banks, hasn't risen during the recent gains on the WSE and it remains undervalued. "A rise of Kredyt Bank's share price has been halted by the pending buyout call," Mazurczak said. "While the whole banking sector was rising, Kredyt Bank remained virtually unchanged." As a result, the earlier overvaluation turned into undervaluation, he said. Kredyt Bank opened the quarter at zł. 17.85 per share. Saluting ING BSK Irena Witkowska, head of the registration department at the central clinic of the military academy of medicine in Warsaw, selected ING BSK. "The bank doesn't advertise much, which is a sign that it can attract clients through its offers and doesn't have to run aggressive advertising campaigns," Witkowska said. ING BSK is an efficient bank, with a very active policy of attracting clients, she said. "It has a good offer for small businesses," she said. ING BSK's shares have performed well on the WSE over the last months, which was a result of the bank's strength, according to Witkowska. "Also, the bank has a strong key shareholder (Netherlands-based ING Bank)," she said. ING BSK opened the quarter at zł. 315 per share. Editor's note: The Business Journal does not intend that contest information should be taken as a recommendation to buy or sell any share. The contestants' stock picks represent their personal views and are not an endorsement of any company.