Update Wednesday, 12th August, 2020

Could This Portfolio Grow Your Capital While Delivering a Salary?

In 2017, with another European winter upon us, we made a key decision.

To leave. The cons outweighed the pros.

And it was an army of little things. English cafés. Small housing. Slow growth prospects. A compliance-sapped business environment. Hard, unhappy schools.

But you had to invest time there to know. Which is sometimes how these decisions need to get made. Take a chance. Have a go. And call time when it’s not working.

And so, once that decision was made, in short order, we sold the apartment, the car, and unwound a life.

Sold up and leaving… Source: Author photo

Surely one of the keys to a happy and prosperous life is to make the right decisions.

Who you marry. What you choose to do. Where you live. And how you invest. These decisions take you down different paths. Each path has its own different destination.

As bad as choosing the wrong path is not choosing a path at all. I see many people waiting by the signboard. Their money locked away in near-zero yield term deposits with the bank.

When investing in the bank stock itself could have yielded more income. And the chance of long-run growth. (Though with more volatility and risk).

So what are the features of great life and financial decisions?

Studies tend to suggest several key traits:

1. Start with a set of ‘founding’ goals and principles

The USA has become a great country in just 244 years thanks to the foresight of its founding fathers. The Declaration of Independence and the Constitution provide a guiding light to its diverse peoples. To live and be governed according to certain unalienable rights. ‘Life, liberty and the pursuit of happiness.’

It follows that those with guiding principles around their life and financial goals tend to be the best investors.

Once you have your destination in mind, this allows you to make countless decision shortcuts. Reducing decision-making fatigue. Ensuring all your decisions have the minimum quality of being aligned to your goals.

For example, the investments I make these days are focused on the key goals of delivering an independent income with some mid- to long-range growth.

This yardstick allows me to more quickly assess certain businesses for a portfolio.

2. Do proper analysis and avoid irrational fear

Poor decisions are the offspring of poor understanding.

Without a clear view of things, the human mind tends to revert to loss aversion, fear of consequence, or blind faith. Decisions get avoided. Put off. Or rushed into.

A good decision can be made with analysis of the pros and cons. Balancing the rewards with the risks. But understanding you’ll seldom get something for nothing.

3. Get an independent view

The world’s leaders make decisions after consulting with trusted and informed advisers. So should you. There is value in getting new viewpoints on whatever you’re doing. Especially investing. Which is part of the value of this subscription.

In a moment, we’re going to conduct a review of some portfolio decisions for monitoring here. And demonstrate analysis on some new watch-list picks. But, first, there’s one more factor to consider.

4. Sometimes you just have to give things a go

So, an opportunity is in line with your goals? It’s looking promising after analysis. Other advice supports it.

Maybe you’re not going to get a true feeling for it until you invest.

Buy a small holding to start monitoring. Book the travel. Make the call.

Once you’re invested — even in a small way — everything changes. The egg is in your nest. And you start watching it like a hawk.

Pro and con analysis

When it comes to investing, the pro and con analysis becomes more like risk v. reward. Not today. But tomorrow.

Mondays, we have our office meeting at Wealth Morning. We go out for coffee and discuss the portfolio. Wholesale accounts we manage. And the investing strategy.

This Monday, John Ling asks, ‘How do you feel about gaming stocks?’

I grew up gaming on old 386 PCs. My 12-year-old son spent last Saturday busking with his violin to raise money for Microsoft’s new Flight Simulator. Out next week for Xbox.

‘Could be recession-proof,’ says Alistair Bilkey.

‘We could do with some non-boomer stocks in our portfolio,’ John suggests.

Stocks for the millennial generation. As opposed to baby boomers. Though the boomers still seem to hold all the money.

We consider the industry. Electronic Arts [NASDAQ:EA] shows some value at a P/E of around 21. One of the world’s largest gaming businesses, it develops games for such franchises as Battlefield, Need for Speed, The Sims, and Star Wars.

But it’s the Price to Book (5.3) and relatively slow five-year growth (4.2%) that concerns me.

Current stock price is around $145. It’s been on a good upward tear since March.

Maybe with some more growth it could see $175 in a year or so.

But that’s only 20% on a long shot. There’s no dividend. And we’re taking on some high-level risk. If their game development plans don’t pan out — if their old franchises go out of fashion — it doesn’t appear shareholders will be left with many real assets or much of a moat.

So we look for an alternative business.

It’s Microsoft [NASDAQ:MSFT] who are putting out the new, much-anticipated Flight Simulator game.

With Microsoft, we get some gaming but also a whole bunch of software that has some moat around it. Of course, we have to pay a bit more for that, but we could also be buying into a growth story. Particularly as potential Chinese competition looks to be shut out.

Crucially for me, Microsoft has done more than twice the five-year revenue growth of Electronic Arts. And I see no reason why that should slow. A potential TikTok purchase at a sharp price could add even more growth.

Meanwhile, in looking for a tech, growth business with a valuation that is not wholly unreasonable — we come across another in the social-media space.

Facebook [NASDAQ:FB] is proving its chops as one of the most targeted and efficient social media marketing platforms. It’s been beating earnings expectations. And could present a little discount due to the threat of government anti-trust regulation.

The value was certainly there in the March crash. It’s got a bit rich again. But volatility could present opportunity.

Finally, we’ve also discovered a tech business based on something more real. It is boomer meets millennial. And makes most to sense to me in the EV space.

It builds these things:

Source: Workhorse.com

Workhorse Group Inc. [NASDAQ:WKHS]. Electric-powered work and delivery vehicles. Plus delivery drones. And fleet metrics.

You see, I’m not yet sold on personal EVs.

I recently heard about a family in our neighbourhood. They have the longer range Tesla Model X. There was a trip downcountry planned for last Sunday. But they hadn’t managed to charge it up quick enough on the home line — which was running via conduit over the public footpath.

So they had to factor a trip down to the rapid-charging spot. Wait for a space. And spend a good part of Saturday readying their machine.

Now, for work and delivery vehicles, EVs make better sense.

When they’re not on the road, they can be in the warehouse, rapid-charging on industrial three-phase power.

Back in June, Workhorse stock jumped from around $5 to $20. The business reported positive net income for the first quarter of 2020. There was possibility of winning a $6 billion contract to provide EVs to the United States Postal Service (USPS). And Workhorse has a 10% stake in Lordstown Motors — an EV pickup producer preparing to go public.

The valuation is now very frothy. There’s doubt around the USPS contract. And some of the shine is coming off the share price.

Today, as I write, there’s a short-selling restriction on the stock, signalling short-sellers are ready to cash in on its overpricing.

At this stage, this is simply a business I’m going to start watching. It has an interesting enough mix of volatility and opportunity. In that mix, there is often money to be made.

We are also adding Microsoft and Facebook to our Watch List. So we’re ready to dig deeper and pounce at just the right moment.

Of these three businesses, here are the numbers that catch our attention:

IB TWS figures as at 11 August 2020

Microsoft and Facebook have strong revenues. Microsoft’s return on capital is stellar. And we like the generous margins in both these businesses.

Facebook and Workhorse have grown very well the past five years.

Workhorse’s Beta indicates its volatility as a speculative play. Given low sales and burgeoning losses, we’d need to see some short-seller oversell smashing the stock price. While being convinced of a real breakout opportunity to ramp up sales. To take any bet on its future.

For now, the decision is to ‘Watch’ these businesses. Valuations look frothy. Bubbling over with Workhorse.

We would need a specific opportunity to board these trains on a value ticket.

Finally, you may have noticed lately we’ve trended toward watching and adding US stocks — in particular Pfizer [NYSE:PFE] and Intel [NASDAQ:INTC].

Part of the reason for this is the softness coming into USD.

It may be a good time to acquire dollars at a reasonable price against other currency pairs.

Portfolio review

Here’s our updated portfolio:

 Current as of 11 August 2020 at 10pm GMT.

We are clearly seeing the impact of COVID-19 on property businesses entered before the crisis.

Crest Nicholson [LSE:CRST] remains an investment in UK housing recovery post-coronavirus. The business appears well-capitalised to ride out a challenging period. We see insiders topping up holdings. A return to profit, dividends, and share-price growth is dependent on property market recovery.

Westpac [ASX:WBC] is deeply tied to the Australian economy and lending (housing) markets. It sits at a rare value point for the nation’s oldest bank. In spite of regulator, legal, and COVID troubles, we continue to monitor as a recovery play. Should good times return, share price and dividend growth could please.

NewRiver REIT [LSE:NRR] was a business we enjoyed excellent growth and dividends from – before coronavirus. The lockdowns completely smashed the share price. Short-sellers also jumped in. But in my view, much of this was overdone. The business has a good set of convenience-focused retail assets. A history of good occupancy. And capital management.

It is starting to show recovery as shoppers return. No doubt Rishi Sunak’s ‘Eat Out to Help Out’ programme is helping. Where diners may enjoy half-price meals — within certain limits — care of the British taxpayer. This was used 10.5 million times in its first week, bringing millions into the High Street. Thank you, ‘Dishy Rishi’.

Immobiliare Grande Distribuzione [BIT:IGD] bargain mall and supermarket property company in Italy is in a similar coronavirus-rocked boat to NewRiver. Previously, we saw strong growth, which has been shattered by the pandemic. The business has managed to retain dividends. Shows great value. And is now dependent on retail recovery in Italy. The share price appears to have bottomed out and may now suggest a re-growth track.

Note: we have increased the risk profile on both NewRiver and IGD from ‘Medium’ to ‘High’ due to the increase in debt (long-term debt-to-equity) through this period.

General Motors [NYSE:GM] could be returning to growth. We like the breadth of this business. And see continued potential in the company’s EV, ride-share, and self-drive initiatives. While carrying increased debt and operating on thinner margins, this business again awaits post-coronavirus recovery.

Cadillac Lyriq. Source: Green Car Reports

If there is one vehicle that may change my mind on personal EVs, it could be the coming Cadillac Lyriq. Still a year or two away, GM claims this SUV could do 480km at the lower end on a single charge.

Aviva [LSE:AV.], the big UK-based insurer, saw a good lift in its share price last week. Up around 7%, leading the FTSE. New CEO Amanda Blanc announced a focus on Britain, Ireland, and Canada. First-half profit was down 12% — less than forecast. And the market seemed to welcome the move away from Asia and Europe, where life-insurance sales, in particular, have been falling.

Stobart Group [LSE:STOB] was one from our Watch List we recently commenced monitoring on. We expected this to be a choppy ride, given the distressed nature of the key airport asset — London Southend. But there is value if the business can survive. It announced recently that Southend is trading in line with expectations. And as risk sentiment becomes more positive in the market, we could well see further growth here.

Finally, one of our key strategic holdings — Charter Hall Social Infrastructure REIT [ASX:CQE] —announced its results for the year ended 30 June 2020.

Here are the key financial highlights:

• Operating earnings of $51.1 million, up 15.6% on the previous corresponding period (pcp);
• Operating earnings of 16.5 cents per unit, unchanged on pcp;
• Distribution of 16.0 cents per unit, unchanged on pcp;
• Statutory profit of $85.9 million, up 25.0% on pcp; and
• Balance sheet gearing of 16.4% with liquidity of $289.61 million.

And key operational highlights:

• Weighted Average Lease Expiry (WALE) increased by 2.8 years or 28% to 12.7 years;
• Settlement of 11 existing childcare properties for $64.8 million, with a further three existing childcare properties under contract for $12.6 million;
• 37 existing assets were sold for a total realised value of $55.9 million; and
• Net property valuation increase of $44.2 million, or 4.4%.

We are up over 60% since March on this investment.

We’ll update further on other holdings very soon.

Thank you for being part of our journey. And following the monitoring decisions we make every day. I trust our logic and explanations make sense.

And are in line with our goal to provide Lifetime Wealth building opportunities.

Of course, many investing decisions will take time to pan out. And we won’t always be right. But with the right analysis, we can be confident of the path we’re steering.

Regards,

Simon Angelo
Editor, Lifetime Wealth Investor