Best Shares To Buy In 2011

With 2010 out of the way, it's now time to turn our our attention to 2011. While I'm sure we'd all like to have a crystal ball which we could look into to see what shares prices have done up to the end of 2011, the reality is the future is unknown. So how can we best position our investment portfolios to grow in 2011? In other words, what are the best shares to buy in 2011.

Retail Shares?

One sector of the Australian stock market which has taken a pounding in recent times is the retail sector. Harvey Norman boss Gerry Harvey was pessimistic at the company's recent AGM. Discount retailer The Reject Shop, which has been an outstanding performer over recent years, shocked the market recently with a profit downgrade. The announcement saw The Reject Shop shares drop to below $13.00 from over $17.00. And shares in JB Hi-Fi have fallen in recent times as well over the uncertainty in near term retail sales figures.

It seems that consumers have slowed down their spending. Some theories to explain this phenomenon are interest rate rises, consumers saving more and paying down debt, the withdrawal of government stimulus spending and general uncertainty over the economic outlook. While any or all of these explanations may be true, perhaps the most important question any savvy investor should be asking is whether the change in sentiment points to a longer term change in spending habits or is just a short-term belt-tightening exercise.

But being the contrarian that I am, I can't help but wonder whether this might be a prime place to look for good shares to buy in 2011. There are a number of very good companies operating in this sector. By looking only at businesses which have conservative debt levels and a history of generating strong returns on capital I should be able to identity those companies which will be able to get through a retail downturn without needing undergo equity diluting capital raisings. And if I take a longer term view (and don't pay too much) I should see a decent return on my investment when retail sales return to normal.

Best Shares This Year The Worst Of Last Year?

Another interesting place to look for shares which may outperform this year is among last years losers. Those value investors among us might like to sift through the rubble to see if there is any value there. The theory is that these companies are currently unloved by the market and as such may be trading at bargain prices.

To get you started, here is a list of the 10 worst performing stocks in the ASX 100 index for the last year.

• Downer EDI Ltd
• Toll Hldgs Ltd
• Primary Health Care Ltd
• Aristocrat Leisure Ltd
• Macquarie Group Ltd
• Aquarius Platinum (Bermuda)
• Fairfax Media Ltd
• Harvey Norman Hldgs Ltd
• Leighton Hldgs Ltd
• QBE Insurance Group Ltd

Please note that these are not recommendations to buy. The list is merely a place to begin your search for a bargain. Make sure you do your home work though as there is often a very good reason for a company's share price to be marked down. It is your job to discover whether the share price punishment is justified.

Strong Aussie Dollar

One of the investment themes as we enter 2011 is the strong Australian dollar. As I write this article it has gone beyond parity and some economists are predicting even further strength. So when deciding what shares to buy in 2011 it might be worth looking at those companies which will benefit from the strong currency.

International travel is cheaper with a strong Aussie dollar. Australians travelling abroad have more purchasing power now and this may drive an increase in the number of Australians holidaying overseas. Obvious beneficiaries of this trend would be airlines like Qantas. Also Travel Agents like Flight Centre could do well.

Another sector which traditionally benefits from a stronger Australian currency is retailing. Those retailers who import their wares from overseas are able to source goods more cheaply and pocket some of these savings in the form of higher margins. However this year anecdotal evidence is that price discounting is eating away at any of these extra profits.

When using these broader investment themes to drive your share purchases, it's important to take price into account. The reason I bring this up is that the market may have already bid up the prices of companies expected to do well from the strong Aussie dollar. So much so that the share prices may already be unrealistically high.

Putting on my contrarian investor's hat once again, maybe another way to play the recent currency gains is to look for companies whose share prices have fallen as a result of the stronger dollar. As the market tends to overreact both on the upside and the downside, perhaps there is value to be found among exporters and other companies whose businesses suffer in times of higher exchange rates. As an added bonus, the share prices of these companies would benefit from renewed investor interest should the dollar fall again.

As I stated above, make sure you do your own research before making any purchases (none of the stocks mentioned in this article should be considered recommendations). Hopefully the ideas discussed will help you find some good shares to buy in 2011.