The performance of the S&P/ASX 200 (Index: ^AXJO) (ASX:XJO) in 2015 was certainly disappointing for many investors as most of the top 20 shares in the index struggled to live up to expectations.
Many of the headwinds facing the big four banks, supermarket owners and miners still exist and this means 2016 could be another year for stock pickers.
It is important for investors to remember the importance of capital preservation and that it is just as important to avoid particular stocks as much as it is to buy particular stocks. Investors who bought stocks like Slater & Gordon Limited (ASX: SGH) and Dick Smith Holdings Ltd (ASX: DSH) in 2015 will have seen dramatic falls in the value of their portfolios, and in the case of Dick Smith, may have lost their capital altogether.
Looking past the top 20 stocks of the index, here are three that may interest investors in 2016:
BUY – Cover-More Group Ltd (ASX: CVO)
Cover-More specialises in the travel insurance and medical assistance markets with a growing focus on international markets. Over the last five years, the company has successfully ventured into China, India, the UK and South East Asia travel insurance markets and these segments are proving to be highly lucrative for the business.
Interestingly, Cover-More is a technologically driven company and this allows many of its products to be easily integrated into its large network of distribution partners. This also results in low capital expenditure and a scalable business model.
Despite a softer-than-expected first quarter trading update, Cover-More is still on track to deliver strong earnings growth in FY16 as a result of new contract wins, margin recovery measures and improved overseas sales.
The recent weakness in the share price has seen the company trade on a forward price-to-earnings (P/E) ratio of around 19 and it offers investors a forecast dividend yield of around 4.5%. With the growing number of tourists venturing out from Asia, Cover-More appears to be an attractive long-term value proposition.
HOLD – Adelaide Brighton Ltd. (ASX: ABC)
Adelaide Brighton is directly exposed to the economic cycle through its large operations supplying large volumes of cement, lime, concrete and other construction materials to the building and resources sectors.
Despite this, the company has done extraordinarily well to keep earnings relatively stable over the past five years with a strong uplift in earnings delivered in the first half of FY15. Underlying profit increased by 14% due to higher cement and lime volumes, improved prices and contributions from new acquisitions.
Although the company remains positive for the second half of the year, conditions in a number of its key markets remain subdued and this could begin to impact earnings over the medium term.
With the shares trading on a P/E ratio of around 15 and offering a solid dividend yield of 4.3%, there is no rush for investors to sell their holdings, but at the same time, the share price would need to be cheaper to make this stock a buy in my opinion.
SELL – Sigma Pharmaceutical Limited (ASX: SIP)
I remain bearish on Sigma and the other pharmaceutical wholesalers as ongoing cuts to PBS expenditure by the Federal Government are likely to lead to a negative impact on sales.
Sigma has been successful in offsetting these losses over recent years by reducing the discounts it offered to pharmacies but this avenue is slowly drying up as the level of discounts offered to pharmacies is now well below its peak.
In addition to this, there remains the risk that some pharmaceutical manufactures may follow Pfizer's decision to distribute their products directly to pharmacies and cut out the wholesalers altogether.
The medium and long-term future of the pharmaceutical wholesalers is unclear and I think there are better investment opportunities elsewhere.
