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Sharemarket analysts are sticking to proven performers in choosing their top stocks for 2010.

To kick-start the year, TheBull has compiled a list of the top 10 stocks from leading broking houses and the reasons behind their choices. Companies with strong free cash flows, balance sheets and attractive dividends appeal, but analysts also point out the investment risks for 2010.

Carey Smith, of Alto Capital, expects a volatile Australian sharemarket in 2010 driven by increasing global interest rates, rising inflation, sharp global currency movements and high government debt levels. Smith says: “We’re taking a cautious approach – we believe our stock choices will outperform the market, particularly if it experiences another correction, which, in our view, is a better than 50 per cent chance.” Fresh from acquiring a 50.1 per cent stake in hardware chain Mitre 10, Metcash is among Smith’s top three stock picks for 2010. Smith says the group’s free cash flow generally exceeds reported profits, highlighting the quality of earnings. Metcash is Australia’s third biggest food distributor and marketer, but Smith says Metcash’s earnings per share growth has exceeded rivals Coles and Woolworths in the past three years. Metcash provides groceries to more than 2500 independent stores across Australia.

Smith says Foster’s Group is among the top 10 alcohol beverage companies in the world. He says the group generates large amounts of free cash flow, historically used for increasing dividends every year since 1995 and for conducting share buy-backs ($1.8 billion since 1997). “We see no reason why this won’t continue in future,” he says.

Attractive fully-franked dividends make Tabcorp Holdings appealing to Smith. He expects Tabcorp to maintain earnings per share of between 75c and 80c going forward, indicating an annual dividend of between 55c and 60c. The payout represents a fully-franked dividend yield above 7.5 per cent, or a grossed up yield of almost 11 per cent. Smith describes Tabcorp as Australia’s premier gaming company. It will spend $575 million expanding Sydney’s Star City Casino. Smith concludes: “In 2010, we believe it’s better to invest in good companies at fair prices rather than worry about the level of the overall market.”

Richard Batt, of Shadforth Financial Group, says Toll Holdings has become a transport logistics giant through successful acquisitions backed by strong cash flows. Toll is leveraging off its dominant position in Australia to expand into Asia. “The company is focusing on taking advantage of trade opportunities that exist between Australia and Asia; this will go a long way in providing a platform to grow earnings going forward,” Batt says. “The pitfall of this strategy is a reliance on a continuing strength in global trade, while investing and operating in markets where the company isn’t the dominant player and a relatively new-comer to the scene.”

BHP Billiton’s diverse customer base and product lines enable it to weather any economic cycle, giving the company more stable cash flows and lower operational risk than its peers. Batt says the world’s biggest miner is well positioned to take advantage of economic growth and stgelopment in every part of the world and is further bolstered by its close proximity to Asian economies. Batt says BHP Billiton isn’t risk free as profits are inherently tied to commodity prices. “It also faces environmental and operational risks and even country-specific risk with some of its assets,” he says. “However, this is more than compensated through its robust balance sheet and its geographic and product diversity.”

Origin Energy’s diverse range of activities appeal; it’s a gas explorer and producer, power generator and energy retailer. Batt says the vast array of stgelopment opportunities, particularly in coal seam gas, will provide Origin with organic growth. “The company has a strong balance sheet to take advantage of opportunities,” he says. More broadly, Batt says the energy sector could potentially provide investors with strong upside in 2010.

Batt expects Neptune Marine Services, a supplier of integrated engineering solutions, to benefit from a positive outlook for the oil and gas industries. Neptune Marine’s services include project design, under water survey work and welding and diving. “There’s growing demand for the company’s services by the major players in the oil and gas industries and Neptune is expected to benefit from the Gorgon gas project in Western Australia,” Batt says.

Mark Goulopoulos, of Patersons Securities, says blood products group CSL has suffered from a strong Australian dollar, “which explains a flat share price performance in 2009”. But Goulopoulos likes the company’s longer term outlook. “CSL has a strong balance sheet, which may be utilised for potential acquisitions in 2010 to drive further earnings growth,” he says. “But the key share price driver in the short term will continue to be the direction of the Australian dollar.”

Corporate activity in the financial services sector leads Goulopoulos to AMP following its initial joint bid for Axa Asia Pacific – since trumped by National Australia Bank. Goulopoulos concludes that AMP is also a logical takeover target due to its commanding presence in superannuation and funds managements. “These businesses are particularly attractive to major Australian banks, therefore speculation surrounding AMP, coupled with the resumption of solid profit growth, should see the stock perform strongly,” he says.

Goulopoulos says WorleyParsons, an engineering service group, will benefit from any oil price recovery, encouraging further investment in the energy sector. Also, growth is likely to be driven by further diversification into renewable energy through acquisition and contract wins. Goulopoulos says strong growth in company profitability is set to resume in the 2011 financial year, but he expects the share price to move up “prior to this stgelopment”. Goulopoulos says the major risks to a continuing sharemarket rally are another fall in US housing prices driven by a second wave of foreclosure sales, a dramatic collapse in commercial property prices, or a sovereign debt default of significant size. “Any of these stgelopments are likely to cause a significant sharemarket correction,” he says.

Company Price

 ASX Code

 Activity

 Share Price

 Metcash

 MTS

 Food distributor

 $4.39

 Foster’s Group

 FGL

 Beer and wine maker

 $5.40

 Tabcorp Holdings

 TAH

 Gaming and wagering

 $7.08

 Toll Holdings

 TOL

 Transport/logistics

$8.94

 BHP Billiton

 BHP

 Global miner

$43.77

 Origin Energy

 ORG

 Energy retailer

 $17.55

 Neptune Marine

NMS

 Engineering solutions

 $0.66

 CSL

 CSL

 Blood products

 $32.05

 AMP

 AMP

 Funds management

 $6.49

 WorleyParsons

 WOR

 Engineering services

 $30.05

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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