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Changing Gears and Blazing a Trail: Your Income Upside Awaits

For months, my wife and I have been trying to get our 12-year-old son to keep his room tidy; to organise his belongings and generally take care of his property.

A canny friend and parent introduced us to the concept of natural consequences.

So, for our trip south over Labour Weekend, we left the packing of his suitcase entirely to him. If something got forgotten or missed, he would have to live with the consequences hours later when he stayed with his cousins in Taranaki.

He forgot his belt.

It was a running joke through the weekend that his pants may not stay up. Suffice to say, he learnt a life lesson.

And so it may be natural consequence that finally sees the UK sign up to Boris Johnson’s deal and leave the EU in the next month or so. But, first, a snap election on December 12 has now been agreed upon.

Natural consequence is an excellent test to apply in finance and investing

The economic focus of governments is on containing inflation. Using monetary policy to lower interest rates in ageing, slowing and mature economies.

The consequence of this is that they miss the asset-and-debt cycles that pose a far greater risk of blowing up the economy.

Well, here in New Zealand, they don’t exactly miss it. They seem to realise full well that without exceedingly high rates of per-capita migration, the current Auckland housing market — and the mortgage debt that fuels it — could crash and threaten the entire economy.

So Auckland roads fill beyond capacity. And the FOMO (fear of missing out) continues to support overpriced homes within the volcanic field.

But this is another story.

For investors, the low yield on bank interest rates creates opportunity for us in stock markets.

But there is also high danger. The danger that we’re paying too much for businesses that may not prevail. That the horrors of 1987 rear up again — where investors overpaid for companies of dubious trade.

This brings me to the test I apply to our portfolio holdings

Are these businesses sound and bankable at reasonable prices? How will they fare in the event of the inevitable boom-to-bust cycle evident in our current economic structure?

Again, I look at natural consequence. Do they have a belt holding things up? What asset values support the business model? And, in the absence of that, what is the degree of speculation?

Businesses also come down to the people involved.

I tend to trust those far more that make their living standing up and moving about, as opposed to those who do so sitting at a desk. Unless they’re a bank.

And most of our portfolio holdings, outside of the banks and insurance company, do make their living from real assets and production. Based on a return on capital — from real assets we can see and value.

One has just jumped.

What strike? GM overshoots earnings expectations, with full-size pickup sales in the US helping out. Source: Twitter @GM

Portfolio update

Crest Nicholson Holdings [LSE:CRST] has shown share-price growth, with signs that the Brexit solution is resolving toward BoJo’s (Boris Johnson’s) deal. Flexit — as the Brexit solution is now being termed — is the process of turning that deal into law, aided by an extension from the EU. To smooth this process, BoJo has to go back to the country for a snap election. And he will hopefully shore up his majority.

But there remain risks around this. Theresa May got burned last time.

Still, analysts see pent-up demand for housing being unleashed on any Brexit certainty.

Earlier this month, Link Fund Solutions disclosed a 7.51% stake in Crest, which we updated in your Latest Alerts section at the time.

Crest was formerly a larger holding of Woodford Investment Management. Troubles with that fund meant there was a large sell-down of Crest earlier this year as the fund reduced its holding from 15% to around 10%.

This seems to have been taken up by other investors, and a lot of the previous buying opportunity below 400p has gone.

We still quite like Crest. Margins are strong. The debt ratio is relatively low. And dividends have been generous — currently in excess of 7.5%.

The company is moving into more affordable homes and build-to-rent properties in conjunction with local authorities.

There are risks to consider, especially at a higher entry price:

• Dividend cover is now under 2, and should margins come under pressure, the dividend could reduce or get cut.
• Margins may come under pressure with more competition in the sector, especially post-Brexit as other home builders look to ramp up activity.
• The wider UK construction sector remains under pressure due to uncertainty and rising costs.

Despite these risks, there remains a housing shortage in England, and this can only exacerbate if forecast population growth continues. Potential cuts to stamp duty from a BoJo government could also provide great tailwind to activity.

Crest, in our view, remains fair buying — at opportune moments. But do consider the risks in this sector.

Westpac Bank [ASX:WBC] remains subdued due to ongoing regulatory activity around banking, potential cuts to the dividend, and margin squeeze as a result of lower interest rates.

This is balanced against Australian housing markets showing new signs of life and a ramp-up of lending activity.

As we’ve said before, Westpac does well in lending markets and we see ongoing value as a buy-and-hold income producer.

In good times, the share price could see more momentum. And the opportunity to buy below $30 may disappear.

Yet risks remain around the delicate state of the Aussie housing market. Despite reports of a rebound, it pays to keep in mind that this rebound is based on historically very low interest rates. Increasing debt. A major shock to the market could push banks to the brink.

Which is why we diversify in the Lifetime Wealth portfolio beyond smaller markets like Australia and New Zealand.

New River REIT [LSE:NRR] has also seen good share price growth from our initial buy recommendation at around 156p.

In July, Woodford Investment Management cut its stake from 11.84% to less than 5%, probably to meet redemption demands.

While the buying is not as good as it was previously and there remains risk around dividend cover, this is still an opportunity to buy into a retail-and-pub asset portfolio at below book value.

Attractive if you can reconcile the risks around retail pressures and property market uncertainty.

This month, the business has completed the acquisition of the Poole Retail Park in Dorset via joint venture with BRAVO Strategies III LLC.

As the company reported:

‘NewRiver will hold a 10% interest in the asset (NRR share: £4.5 million) and will benefit from 10% of the net rental income (NRR share: £0.4 million per annum). NewRiver will be appointed as asset manager, in return for a management fee calculated with reference to the gross rental income of the asset, and will also receive a promote based on financial performance.’

The deal reflects the company’s growing opportunity as not only an owner of retail properties but an experienced manager of them.

Tassal Group [ASX:TGR] released to the market a Sustainability Report and AGM Presentation. This has been another record year of growth, with revenue increasing 15.7%. The company is now poised to profit further from the capital raising and new investment into prawn farms.

A full copy of the AGM PowerPoint can be downloaded here.

While there remains seasonal harvest risk and uncertainties around the global outlook, we’re retaining positive ‘Buy Up To’ sentiment on Tassal.

General Motors [NYSE:GM] rewarded those who took a risk on the strike resolution.

This strike is now officially over when workers voted overwhelmingly in a deal struck between the UAW and company executives.

GM lost an estimated $2 billion in production and the workers $1 billion in lost wages.

The production loss to GM may not be as bad as it seems, since inventories were used to maintain sales. We must distinguish lost production over the more crucial count of lost sales.

On that front, the stock has just jumped 4.5%.

This morning, GM announced third-quarter earnings. It exceeded analyst expectations and overshot revised guidance following the strike. Here’s the numbers for Q3 (USD):

• Adjusted earnings: $1.72 per share vs. $1.31 expected.
• Revenue: $35.47 billion vs. $33.82 billion expected.
• Average transaction price: $42,176 per vehicle, up nearly 3%, for a third-quarter record.
• 793,000 vehicles delivered in the US in Q3: up 6%. Leading the way were full-size pickup trucks and new crossovers.
• Nearly 1.87m vehicles delivered globally.

As previously stated, GM has a loyal customer base and a strong pipeline of development, with auto-tech upside.

The next quarterly dividend of around 38c per share is payable in December.

Yet there is another battle looming on the horizon for this automotive behemoth.

The State of California is applying stricter emission rules. The Trump administration is opposing this on the grounds that these standards must be set at a federal level. GM, Fiat Chrysler and Toyota are siding with Trump.

Over the long run, GM is seeking to reduce emissions via electric vehicles and alternative fuels.

In the short run, siding with Trump may not be a bad thing, since the company has previously got on the wrong side of his administration for proposing to idle a plant and lay off 1,600 workers in Ohio.

I would look for any softness in the share price to top up GM.

There remain margin pressures and demand risks around automobile manufacture, but long-term upside with new technologies — of which GM is blazing a trail.

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 30 October 2019 at 8pm GMT.

Adding to winners could make sense.

Should you need assistance with global brokerage, I’m delighted to announce that we have an exclusive Masterclass now available.

It will take you through initial setup and the loading of some live trades (in a paper/practice account).

If you’ve not done so already, you can add this optional module to your Lifetime Wealth Investor subscription here.

As usual, this week is looking to be a hive of development across our economies and companies.

We’ll keep close watch and look out for buying opportunities and new acquisitions for the portfolio.

Regards,

Simon Angelo

Editor, Lifetime Wealth Investor