The sharemarket has become overvalued in the past three months after a strong rally in prices.
A Morningstar report says there were a few select opportunities in what was a "stretched market", with the top 50 index rising 10 per cent since late June. The best ideas for investment at present include Mighty River Power, SkyCity, Telecom and Chorus, according to the report.
The overvalued market meant a cautious approach was warranted with stock selection critical, Morningstar said.
The report suggested Fletcher Building was well overvalued, trading at a 30 per cent premium to Morningstar's fair value estimate.
The short-term picture would be super-charged by one-off rebuilding work in Christchurch.
Fletcher Building faced fierce competition and low barriers to entry into the sector.
Mighty River Power was "the best idea" in the electricity sector, with investors holding back ahead of the relatively large upcoming float of rival company Meridian Energy.
MRP shares were up 3c to $2.27 yesterday, but remain well below their initial issue price of $2.50 a share.
MRP shares appeared to be "modestly undervalued" and offered a compelling net dividend yield of 5.9 per cent.
Investors had over-reacted to the risk of regulation of the power sector under a future Labour government and the potential closure of the "all important" Tiwai Pt aluminium smelter in Southland.
Telecommunications was the cheapest sector in the market, with both Telecom and Chorus undervalued and offering good value, Morningstar said.
Despite a strong rally off its lows in July, Chorus remained undervalued and one of the "best ideas".
Chorus shares traded at $2.76, up 8c, yesterday, and well up from a recent trough of $2.28 in late June.
Telecom was also undervalued, with management's turnaround strategy not factored in to current prices. Telecom shares traded at $2.30 yesterday.
The shares briefly spiked to more than $2.70 in May, but quickly slumped as low as $2.16.
Morningstar said that it gained some confidence in Telecom's strategy to deliver longer-term growth after the latest 2013 result showed signs of a turnaround.
SkyCity Entertainment shares were trading at a "healthy discount" to the share's intrinsic value and "appear compelling in our view". The market was being overly pessimistic on the shares, the report said. They were at $4.05 yesterday.
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