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Your First Weekly Update — In Search of Passive Income

July 31, 2019

It’s great to have you on board.

Today, I’m going to share with you three investments I’ve spend the past month analysing. Two are to kickstart our Lifetime Wealth Investor portfolio. One is for comparative purpose. And for property investors.

But we’ll get to them in a moment.

First, a little quick housekeeping:

Each week, we’ll be sending you a regular update with ‘Buy’, ‘Sell’ or ‘Hold’ recommendations, along with the detailed macroeconomic, sector and business reasons why. We’ll be aiming to help you build up a global portfolio to generate growth and income.

The other updates you’ll receive to your inbox are Latest Alerts.

These are also updated in our members’ section. They cover specific updates on our portfolio companies, such as dividends, insider buying and other key market announcements.

Together, we hope to provide to you an institutional-grade research service to take your investing to the next level.

So this is where we begin…

Seeking passive income

This is probably the key reason I invest — to generate income and wealth I don’t have to sell my time for. And I use my surplus and savings to help achieve it.

I grew up in a regular middle-income family. Dad worked in engineering at a dairy factory — and then an oil company. Both good jobs, though sometimes requiring long hours. Mum was mostly at home with me and my two younger sisters.

It was a wonderful childhood, spent mostly in a semi-rural environment.

We had some good routines. Fish and chips and a treat on Friday. Trips to the empty beach on the weekend. Picnics by the lake with friends. Tramps on the mountain or sledge rides in winter. Go-karts and tree huts. Church on Sunday. Dinners out for birthdays.

But like most families back then, we depended on Dad’s sole income.

So, when mortgage rates went well into double figures in the 1980s, we were reminded of the slenderness of our existence.

And then, as I left to go to University in the 1990s, Dad got made redundant. A tough time for him as he worked to build a consulting business, before going back as an employee in later life.

All this left an impact on me. And a conclusion:these days, you cannot depend on a job alone.

In fact, I’ve never had one for more than six months. I’ve built businesses. Then invested. Generating multiple and ongoing sources of income.

My dad had it lucky. I know a guy with graduate qualifications in business who got made redundant several times. The stress weighed on him. His marriage broke up. Last I saw him, he was looking to go into the police force.

To generate passive income, you need a little surplus to invest. Then you need the right vehicle.

Property?

The elephant in the room is the question — ‘When it comes to passive income, should I choose stocks or property?’

I can’t answer this for your individual situation. But I can give you an example of a fine property investment case I just investigated. And explain why I chose some stocks instead.

Source: RealEstate.co.nz

The property is in a relatively prosperous regional centre, where it is possible to get a higher yield for sub-$1 million. There is a level of income diversity thanks to three tenancies: a rental shop, a two-bedroom flat and a holiday accommodation facility promoted via Airbnb.

Here are some approx. numbers on the investment case (based on numbers supplied by the real estate agent):

We have assumed a loan LVR of 65% — which is an expected maximum for this type of property.

WARNING: Figures are estimates only. This does not allow for periods of vacancy for the flat or shop. It does not consider your management time in running the investment or the accommodation component. Single location property investment may lack diversification.

Now, hypothetically, if we were to allocate the same funds to our income share pick today — broker forecasts are met and dividends are retained — it could potentially look like this:

WARNING: For illustrative purposes only. If this is the total investment pool, investors should diversify across multiple stocks. Dividends are not guaranteed; they may increase, decrease or be cut altogether. Broker forecasts are targets only, and the share price may rise, as well as fall. Your capital is at risk. Margin lending is only available to sophisticated investors and carries additional risks.

Stock picks

Perhaps from the above, you’ve sensed that property returns are more stable and calculable. Stocks and shares are more volatile and uncertain. But could potentially offer higher return.

When buying global stocks, there are two potential drivers of return:

• Gains in unhedged forex.
• Gains in the stock price.

We did not consider forex opportunity (or risk) in the above.

GBP against other majors appears soft due to Brexit fears and the possible replacement of Theresa May with a Eurosceptic leader. Odds are on Boris Johnson.

GBP.USD is 1.2518, GBP.NZD 1.8894 at the time of writing.

Once Brexit is settled – providing smooth settlement can be achieved, I would expect GBP to gain against USD and other majors. There is a potential gain of 10-20%. However, this is speculative.

Back in May, Warren Buffett announced he is looking for a major acquisition in the UK. Perhaps the currency pair is one reason. Also, economic indicators remain positive for the UK, with low unemployment and population expected to grow to 70 million by 2029.

Within this setting, investors should also look to capture gains (and protect themselves) from another geopolitical trend: increasing global volatility within what is now a very long buy-and-hold bull market.

Volatility is linked to the rewriting of world trade rules driven by the Trump administration, high debt levels and developed economies on low interest-rate ‘life support’. There are also potential flashpoints in the Middle East and with North Korea.

Idea 1: Mid-cap, income with growth potential

Crest Nicholson Holdings plc [LSE:CRST] is a quality, proven homebuilder focused on the south-east of England. It is listed on the London Stock Exchange. Its stock price is beleaguered by Brexit uncertainty. Yet the long-term outlook remains positive.

A Crest Nicholson home in Cranleigh Surrey selling for £550,000. Source: Crest Nicholson.

There’s a shortage of homes in England, with additional tailwinds from the ongoing government ‘help-to-buy’ programme.

Brexit uncertainty means the current share price reveals some very attractive fundamentals with opportunity written all over them:

Source: Interactive Brokers TWS figures as of 30 July at 8:45pm GMT

I’ve been a Crest Nicholson shareholder for some time. I like the steady dividend income and have seen the quality of their new-build homes. Debt levels are low. Margins are above the sector norm.

In particular, the P/B (price to book) is based primarily on tangible land holdings in England. You are buying the stock close to the value of balance sheet assets.

The company should have the reputation, land holdings and ability to ramp up homes post-Brexit. At this point, I expect continued strong income for investors but also potential upside in the stock price toward analyst ratings in excess of 450p (UBS 19 June).

The income potential is based on a good history of paying regular dividends alongside reasonable dividend cover. The growth upside considers analyst ratings in line with a growing shortage of housing in the UK.

In fact, research last year by Heriot-Watt University found that England had a backlog of 3.91 million homes, ‘meaning 340,000 new homes need to be built each year until 2031.’

Crest Nicholson, although experiencing subdued demand now due to Brexit uncertainty, is in a good place to assist with building more houses given their pipeline and landholdings.

At the time of writing, the stock trades around 360p. Over the medium- to long-term, there is potential gain of 25% on capital (if the stock realises the analyst rating of 450p), with dividend payments on top of 6-9% per annum (if the company maintains its dividend policy).

As mentioned, there may also be 10-15% upside on the GBP pair for USD, AUD or NZD investors. Although there is always risk with forex that the foreign currency can fall or rise against your home currency. In addition, currency exchange and brokerage will add nominal fees.

The key risks are that the company does not enjoy post-Brexit expansion in the housing market. That dividends may be cut. And that the Brexit outcome is such that GBP weakens further.

Idea 2: Small-cap, speculative

Greatland Gold plc [LSE:GGP] is a small exploration company. They’ve discovered what looks to be a sizeable gold deposit in Western Australia.

I first came across the company from a friend and long-time gold investor in Jersey. He invested, enjoyed some initial gains and wrote to tell me about it.

As global stock markets become more volatile, investors turn to uncorrelated assets such as gold and even cryptocurrency.

A small, promising mining stock can not only capture gains from mining successes but could protect the downside as the value of gold increases, even in a falling market.

Greatland Gold has a market cap of £55.67m. It is listed on the AIM (small-cap) index of the London Stock Exchange. The stock is 83.3% owned by institutions and 5.1% insiders.

Sprott Equity Research has produced a detailed, independent report on the significance of their initial Havieron gold discovery.

This is now being followed up with a joint venture with Australian mining giant, Newcrest Mining Ltd [ASX:NCM].

Greatland has signed an $US65m farm-in agreement with Newcast.

Newcast will explore further Greatland’s initial discovery with an initial 10,000-metre drill, and it has the option to acquire 70% of the project by spending up to $US65m over a six-year period.

Meanwhile, Greatland is continuing its approach of finding other promising deposits.

It’s also commencing exploration at the nearby Paterson Range East site, where it holds a licence. It will begin with a detailed, low-level airborne magnetic survey covering around 5,200-line kilometers.

As it stands, Greatland in joint venture with Newcast is exploring a gold deposit of worldwide significance. The company also has several other early-stage exploration projects underway in Western Australia and Tasmania that could yield sizeable deposits.

The portfolio of licenses is exciting and contains value that could quickly multiply. Although highly prospective, the geological areas within these licenses are known to contain reserves of gold and nickel.

These areas to date have been under-explored, yet the mineralized systems are well-known.

If deeper drills confirm the extent of initial finds, stock price could multiply.

Note, this is a highly speculative investment.

The future value of this company depends on the result of deeper drills. Even though initial results look promising, a deeper drill may reveal deposits that are much less than anticipated. And because the company is LSE listed in GBP you may be exposed to forex risk due to currency movements.

These recommendations stand out from thousands of stocks. Greatland Gold may offer a rare opportunity to multiply your investment based on speculative but promising gold finds. Crest Nicholson offers rare value with growth opportunity and holding income. Additional forex gains may further enhance both for USD, NZD or other offshore investors.

So, to kick us off, here is what our current model portfolio looks like:

Current as of 30 July at 8:45pm GMT

I’ll be in touch again soon. Do check out our Members’ Site and the new ‘How to Buy Global Stocks’ area.

Remember, investing in equities carries risks. Stock values may rise as well as fall, as may the income from any dividends. Speculative stocks such as Greatland Gold carry high volatility risk. Global stocks that are not denominated in your home currency carry forex risk as mentioned. Do seek independent financial advice based on your personal circumstances.

If you’re new to global stocks, I suggest starting small. A fine journey begins with a single step.

Happy investing,

Simon Angelo

Editor, Lifetime Wealth Investor

Important disclosures

Simon Angelo owns shares in Crest Nicholson Holdings [LSE:CRST].