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Vroom, Vroom: Finding the Perfect Mix of Performance and Value

I enjoy a good road trip.

One of the longest I’ve taken was from Windermere in England’s Lake District to Rome, Italy. Those were the days before GPS. When you have map books. And scant French and Italian to ask directions. And there are added complications when you’re making that trip as a newly-wed.

But all arrangements survived the journey.

Now our boy’s legs are getting longer by the day. And it’s time for a vehicle with a bit more space. So I’m looking to buy an SUV. I am succumbing to one of the tractors that clog up the North Shore’s arterials.

But I don’t just want any tractor. I’m looking for performance, safety and value. In fact, the same qualities I’m looking for in my portfolio, bar one. In my portfolio, I’m also looking for income. At least enough to live on.

I have skin in the game

The stocks I cover here are usually in my own portfolio. When recommendations are made, my ownership is disclosed, and I am bound by our company’s trading policy.

I’m a strong believer in the time-honoured principle of not serving food that you yourself are not eating. This is one of the problems in the finance industry. Advisers may try to sell you funds or schemes. But they themselves have nothing to lose if they do badly.

As my portfolio is along the same lines as this here at Lifetime Wealth, I do well when this portfolio does well. Should it fall — or the dividends get cut — well, that SUV purchase may hit the ice.

So, to clarify, we’re scouring the world for the best options to achieve:

• Performance (growth)
• Safety (capital preservation)
• Value (fundamental bargain factor)
• Income (a healthy running yield via dividends)

And I’ve found an SUV that meets these requirements:

Alfa Romeo Stelvio. Source: Alfa Romeo

Performance

It’s one of the world’s fastest production SUVs. The Quadrifoglio does 0-100 in 3.8 seconds. The diesel (shown here) 6.6 seconds.

The same principles apply with a great investment portfolio. With a smallish engine, you want to extract as much growth and income as possible.

For this to happen, you need to find value, macro opportunities (in the global economic environment) and certain situations waiting for uplift.

Safety

Eurocap shows a 97% level of adult-occupant protection on the Stelvio. Among the highest in class, and similar to more grandfatherly vehicles like the Volvo XC60, apparently one of the safest cars on the planet.

For the share portfolio, we look for safety in preservation of capital. It’s about managing risk and considering the asset backing and customer base that’s supporting the businesses we own.

Value

Now, Alfa Romeos of times gone by do not have the best record for reliability, build quality and rust. The brand is reinventing itself. Across the new line-up, covering the Stelvio, Giulia and Giulietta, there’s an intense focus on quality. The company knows all too well — get these models wrong in a competitive market and the brand could get permanently sidelined.

This provides a situation. A company unable to charge Porsche prices but determined to deliver something as good.

And we chase this factor a lot in portfolio picks. The reinvention story. The rebound stock. The beaten dog that could ultimately shine!

Income

Well, buying an SUV is technically going to reduce income. Less money to invest means a reduction in yield.

So, we tell ourselves that the joy of driving this machine will be ‘motivational’. Perhaps you’ll see a Wealth Morning bumper sticker on the rear glass.

In our Lifetime Wealth portfolio, we target a running yield in excess of 5% per annum. We’re currently sitting on 7% if you exclude the speculative (non-dividend paying) option.

Now, how are we tracking on these measures in our portfolio? And where are we at with ‘Buy Up To’ recommendations?

As we go to press, we’re waiting on the Reserve Bank of New Zealand OCR announcement

This will impact the NZD and ability to obtain other currencies for New Zealand investors.

If you hold USD or GBP, it may be a good time to invest.

Right now, it’s worth noting that net-speculative short-positioning on the NZD is near a historical high. This means that currency speculators are selling short NZD and could see further downside in the currency.

Should the Reserve Bank hold rates, NZD may strengthen, and this may be a good time to get into other currencies. Remember, with any currency exchange, there is the risk of appreciation or depreciation in the near-term and long-term.

Meanwhile, GBP has strengthened. Nigel Farage, leader of the Brexit Party, has said that he won’t stand candidates in the 317 electorates won by the Conservatives in the last election. This is to help boost the chance of Boris Johnson securing a majority government in the December 12 election. And paving the way for the smooth voting of his deal.

Good news for Boris? Yes, but he’s still hoping to win over some Labour-held seats where the Brexit Party may still stand candidates. And when it comes to British politics — the only certain thing is that there will be discussion and debate. Seemingly endless.

Watch for volatility and opportunity with the pound and FTSE stocks.

Portfolio update

Crest Nicholson Holdings [LSE:CRST] continues a downward trend after the profit warning last month. Despite enthusiasm for this business, financial reporting is showing the heavy impacts of Brexit uncertainty on the home-building sector.

Brexit or no Brexit, this remains a seasonal industry. You want to buy the dips and hold for the income. Currently the dividend appears on track but we will be monitoring the situation.

We’re retaining a ‘Buy Up To’ on Crest. But reducing it to encourage value buying. Please see the portfolio below and online for this update.

New River REIT [LSE:NRR] is a bit like Alfa Romeo. The retail sector in Britain has been beaten down with a poor record through Brexit. It’s trying to recover. And in the case of New River, through an innovative focus on convenience, community, recycling assets and considering residential additions.

Pre-election volatility is creating good opportunity to buy into a business with a share price that is still below book value. We’re reducing our ‘Buy Up To’ to encourage keener buying.

Tassal Group [ASX:TGR] is starting to show signs of uplift. Earlier this week, it rose 4%, though has since slipped with general Aussie market malaise.

There was early news that the US and China were close to reaching a trade deal. Then Trump mentioned that he’s not ready to cut any tariffs yet.

Australasia, and in particular the seafood industry, depend on free and open trade. Ongoing worries in this area may impact this share price.

Long-term, we see continued growth for Tassal. The key is to find value in the seasonal dips and benefit from the dividend yield (4.7% at time of writing) along the way.

Aviva [LSE:AV] showed value when we recommended it around this time last month. It’s now shown performance. Had you followed our ‘Buy Up To’ you’d have enjoyed growth of around 15% in a single month.

Last week the company continued its renewal program, poaching Jan-Hendrik Erasmus as group Chief Risk Officer (CRO) from Dutch Group NN. Erasmus was instrumental in strengthening NN Group’s risk framework and contributing to a stronger, more resilient company.

We like Avivia due to the huge insurance customer spread — some 33 million worldwide — which provides a margin of safety to the business, particularly when obtaining the shares at low P/E (price to earnings) and P/B (price to book) ratios.

At time of writing, P/E is 7.4, P/B at 1 (share price sits at about the actual book value) and Dividend Yield is around 7%.

Like the Alfa Romeo Stelvio, we see qualities of reinvention, value and potential safety in the current Avivia share price. Plus income and potential performance.

Of course, large insurers are currently at risk from the many smaller upstart minnows biting into their business. There is the risk this could get worse.

But we’re betting on consolidation.

Greatland Gold [LSE:GGP] this week commenced a new drilling programme at their wholly-owned site at Warrentinna in Tasmania. The purpose of the drill is to provide additional geological data for a potential project divestment.

To date, the project has outlined a gold-mineralised system approximately 150 metres long and 100 metres wide. The company is looking to see whether similar prospects exist as seen elsewhere in Australia.

Again, this pick remains purely speculative. Should the drills reveal more promising results, there will be share price escalation. Meanwhile, the price is showing signs of investor impatience.

Immobiliare Grande Distribuzione [BIT:IGD] has had a little boost lately with two recent announcements.

First, it is reducing share capital by allocating some share capital to a legal reserve. This means less shares will be available on the market, potentially increasing the value for existing holders.

According to the company, ‘the reduction is aimed at giving greater flexibility to the equity structure, through the increase of the unavailable legal reserve and the simultaneous establishment of an available and distributable reserve.’

It also assists the company in meeting its requirements under the SIIQ regime (Italian Real Estate Investment Trust) to distribute 70% of earnings while meeting yield expectations.

Second, the company announced a bond issue to institutional investors of non-convertible notes of up to €500 million. The coupon rates on the bonds are 2.5% to 2.65%.

The purpose is to reduce the cost of debt faced by the business.

We view both these announcements as positive for the potential capital return of the business.

But we remind investors that Italian real-estate comes with risk. Due to the political situation in Italy reflecting a fractured parliament and a government dealing with high public debt.

A bit like buying an Alfa Romeo. Given past performance, it’s appears a somewhat more risky marque than, say, a Mercedes.

Yet, at the right price, a risk that could be worth taking given the ‘improve or die’ focus.

The company continues to develop its malls with a focus on increasing footfall. Most recently, it upgraded its Casilino Shopping Centre property in Rome, celebrated by a series of weekend events lifting footfall by 11.4%.

Casilino Shopping Centre upgrade, Rome. Source: IGD

Here’s our portfolio as of last market closes. ‘Buy Up To’ guidelines are adjusted to consider the current set of opportunities:

 Current as of 12 November 2019 at 9:00pm GMT.

In the week ahead, we’ll be processing a number of macro factors. The interest rate decision in New Zealand. The run-up to the British election. Ongoing trade war salvos. The economic situation in Europe.

And we’ll have a new recommendation in time for our next market training event.

Speaking of which, are you still struggling with how to invest in our Lifetime Wealth portfolio? Do you need help with using a global brokerage?

Then I would really encourage you to come to our live event on Friday November 22. We’ll give you a step-by-step demonstration of how we do our trades, and we’ll answer your questions.

If you haven’t signed up for a ticket — I recommend doing so here while there’s still availability.

(Use the promo code LTWI_Discount for a deep discount off the ticket price).

Buon investimento!

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor