Johannesburg - Analysts believe the local market is currently trading at fair value, making stock picking more necessary. Three well-known analysts have told Fin24 in a snap survey that they prefer cheap stocks, shares that are defensive and those that have rand hedge qualities. 
Cheap stocks are those that have low price to earnings ratios. Defensive stocks are those that outperform even in tough economic times because their products are always in demand. The rand hedge shares perform well even when the local currency weakens. 
Rajay Ambekar, a portfolio manager at Investec Asset Management, picked two stocks, Anglo American [JSE:AGL] and MTN Group [JSE:MTN]. 
ANGLO AMERICAN
Ambekar says the global mining giant is already discounting a significant fall in metal prices. He believes the most relevant "valuation metric" is price to book and Anglo is trading at about 1.1 times its book value.
"Going back in its recent history, the only time it has traded at this level was 2002, which proved to be a great buying opportunity," Ambekar says. Book value is the value of an asset as it appears on the balance sheet.
MTN
Ambekar says the cellphone giant is a good example of a defensive rand hedge stock. "Its earnings are not cyclical, given that they are similar to a utility and approximately 70% of their earnings are derived from outside SA, making it a reasonable hedge against a weakening rand," Ambekar says. 
He believes mobile voice penetration in the company's non-South African operations is still relatively low. "We see an excellent opportunity for them to grow their mobile data revenue streams," he says. 
Alwyn van der Merwe, a director of investments at Sanlam Special Investments, picked Old Mutual [JSE:OML], Astral Foods [JSE:ARL] and Wilson Bayly Holmes - Ovcon [JSE:WBO]. 
OLD MUTUAL
Van der Merwe says the international wealth manager has a 40% discount to embedded value (EV), which is good by any standards. The EV of a life insurance company is the present value of future profits. 
ASTRAL
He says the food producer is in the right sector, which has done well in the recent past. "They are good quality and have held very well."
WBHO
He says the construction company has value because the sector has already been hit hard by the recession. "This means the margins have already been off," says Van der Merwe, implying the only way for the stock is upward. 
Steve Meintjes, a senior analyst at Imara SP Reid, picked Discovery Holdings [JSE:DSY] and DRDGOLD [JSE:DRD].
DISCOVERY
Meintjes says the health insurer has turned around all its problematic UK units. "Their earnings in the local operation have also been very positive." 
DRDGold
Meintjes says the fourth-biggest gold producer is good because it is in the gold mining business. "Gold is a special kind of commodity. It benefits from volatility," he says.