One UK stock after another in my portfolio has tumbled in the last few turbulent days but investment company 3i Group (LSE: III) has held the line.
It’s down just 6% over the last month, which I think is pretty decent, given the chaos caused by Donald Trump’s tariff threats.
Look back a little further, and it’s frankly magnificent. The shares are up 30% in the past 12 turbulent months, and a staggering 365% over five years. That makes them second only to Rolls-Royce.
Can this FTSE 100 star keep shining?
The FTSE 100-listed private equity specialist never really attracts much attention from private investors. That’s their loss. I’m thrilled I took a chance on it.
Yet in recent months, I’ve been having debating whether to bank some of my profits. After its winning streak, it’s now the biggest individual stock in my self-invested personal pension (SIPP), making up more than 10% of the total. So what’s the issue?
A huge chunk of 3i’s success comes from just one company, European discount retail chain Action, which it bought in 2011. Back then, Action had just 250 stores.
Today, it’s closer to 3,000 and 3i reckons it can increase that to 4,850 locations. It’s been a powerhouse, with sales up another 22% last year to €13.78bn and operating earnings climbing 29% to €2.08bn.
But nothing grows forever, and I do worry what happens if Action starts to slow down, even a little. It would hardly be surprising, given the fragile state of the European economy. Although maybe being a discounter helps.
Action now accounts for around three-quarters of 3i’s total assets, so it really is carrying the show. The board says the rest of its holdings are “resilient”. That’s fine in today’s challenging times, but hardly thrilling.
Low yield but bags of growth potential
Another worry is the price. The investment company trades at a whopping premium of 45% to the value of its net underlying assets, which would normally scare the beans out of me. But when the business is this strong, maybe that’s fair.
The 1.8% yield is nothing special, but it’s covered more than eight times by earnings. So there’s room to grow. And if 3i ever decides to cash in its Action stake, shareholders could be in for a treat.
The analysts are still upbeat. Of the nine offering a 12-month forecasts, the median target is 4,361p. That’s about a 12% lift from today’s price. Not spectacular, but respectable. Of course, these days forecasts are even more guesswork than they were.
Still, out of 10 brokers, seven say Strong Buy, two say Buy, and just one sits on the fence. No one’s calling it a Sell, which says something.
So despite the concentration risk and the premium price tag, I’m sticking with it.
What I thought was a risky stock barely flinched during recent stock market volatility, and given that its track record stretches back to 1945, there may be a good reason for that. Investors considering 3i must look past its stellar past performance though. Sheer size means Action simply can’t keep growing at the same speed, but like those analysts, I’m not selling.
