At a 5% annual yield, generating £60,000 of income would require an invested portfolio of around £1.2m. This immediately reframes the challenge: passive income at this level is less about clever stock-picking and more about long-term capital accumulation.

Ambition matters. But so does arithmetic.

If someone were to max-out their Stocks and Shares ISA every year — that’s £20,000 of annual contributions — and achieve a 9.6% return on average — that’s the average Stocks and Shares ISA return over the past decade — they would surpass £1.2m within 20 years.

So, it’s achievable. The question most people are asking themselves, however, is ‘what should I invest in?’.

Investing to build wealth

The most successful investors typically use a numbers-led approach to build wealth. This means relying on data and metrics to identify undervalued stocks, not a hunch.

That’s incredibly important. Typically, equity researchers or investment banks will have vast datasets and large quantitative models. But that doesn’t mean retail investors can’t invest in the same way. The data is available for all across the internet.

One on my watchlist

One stock that is scoring well on multiple quantitive models is CommScope (NASDAQ:COMM). It’s a global supplier of infrastructure solutions for communication, data centres, and entertainment networks. Unsurprisingly, it’s been doing rather well thanks to the AI revolution.

But there’s more to unpack here. The company has been doing really well operationally this year. However, it’s in the process of selling its Connectivity and Cable Solutions (CCS) division to reduce its debt burden.

The stock currently has a market cap around $4.4bn, but has a net debt position around $6.5bn. It’s selling its CCS division for $10.5bn, although $500m will be lost in fees. The deal is in cash and expected to complete in the first few months of 2026.

So, what’s left after the sale?

Well, we’re looking at an enterprise value of $900m. In its Q3 results, the business noted that RemainCo — the internal name for the parts of CommScope that will remain after it sells its CCS division — achieved net sales of $516m — 49% above the prior year — and adjusted EBITDA of $91m.

RemainCo is expected to deliver between $350m and $375m in EBITDA for 2025 as a whole. This isn’t net income, but broadly we can see RemainCo trading around 2.5 times EBITDA for the year when adjusted for net cash. This is an EV-to-EBITDA ratio… and the sector average is a lot more than 2.5 times — it’s 14.9 times.

The issue, however, is that RemainCo is inherently more cyclical than the CCS division. This year has been a good one for RemainCo, but next year might be slower.

The maths also isn’t straightforward. There will be a special dividend following the sale, and that means the company is unlikely to be sitting on all that cash. Some will be redistributed to shareholders.

Despite this, I certainly think it’s a stock worth considering. It’s up over 300% this year, but evidence suggests it could go higher.

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As such, my focus for now is on building wealth within the portfolio. That means making monthly contributions, investing carefully in growth-oriented stocks to try to beat the market, and reinvesting any gains to compound.

So, where am I looking to invest?

High-potential stocks

You may wonder why I’m suggesting two of the largest companies in the world in Nvidia and Micron are high potential, but it’s not about their size. This is all about relative valuations and where the stocks could be trading at.

The common denominator in this list is the price-to-earnings-to-growth (PEG) ratio. In simple terms, this is a metric that divides the forward price-to-earnings ratio by the expected earnings growth rate for the medium term.

It’s not always accurate, partially because it depends upon forecasts by analysts. Analysts can be wrong, but when we’re using consensus data, and that consensus is built on tens of analysts’ opinions, there’s definitely some credibility.

And for me, it’s one of the best indicators for an undervalued stock. Traditionally a PEG ratio under one was considered an indicator of a cheap stock, but it’s probably best to see it in relative terms. For example, Nvidia is on this list because its PEG ratio is a 40% discount to the IT sector average.

In fact, all these companies trade at huge PEG discounts to the sector average.

Do I have a favourite?

Micron is my largest holding, and Nvidia my second. However, in terms of the stocks I don’t own, I’m finding CommScope Holding NASDAQ:COMM) very interesting.

This $4.6bn company has seen its share price surge 321% over the past 12 months. And when you look at its quarterly earnings reports, that’s not surprising.

In Q1, it delivered twice the earnings the market expected. And this trend continued into Q2 and Q3. Earnings growth for Q4 is expected to be 159% above where it was last year. But we’ve seen these kinds of trends before in the sector.

CommScope delivers infrastructure solutions like connectivity and cables (CCS), for data centres and entertainment networks. There’s so much money being spent on data centres globally right now, but especially in the US.

However, CommScope is actually selling its CCS business to Amphenol for $10.5bn. This should clear the $6.5bn of debt on the balance sheet, potentially resulting in a $3.5bn net cash position ($500m in fees and taxes).

This will leave the business with a healthy balance sheet and two cyclical businesses. These are access network solutions (ANS) and Ruckus — network tech. These two businesses are performing well, with Q2 revenue of $513m, 58% above 2024.

In short, following the CCS sale (due in early 2026), this stock could look very cheap when adjusted for cash.

However, if the deal doesn’t go through, it will be a heavily indebted company relative to its market cap.

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