In general, FTSE 100 stocks have a reputation of being steady income investments. The idea is investors probably won’t go broke owning them, but they also won’t get outstanding returns.
That might be true of the index as a whole, but a £10,000 investment in 3i (LSE:III) a decade ago is now worth more than £85,000. By any standards, that’s worth paying attention to.
Outstanding returns
A decade ago, the 3i share price was around £4.95. Fast forward to today and the stock trades at £42.32 – an increase of 755%, which is the equivalent of compounding at 23% a year.
Importantly, it’s also not as though the stock’s momentum is all in the distant past. Over the last 12 months, it’s up almost 50%.
3i’s 10-year record compares favourably with even the most impressive US shares. In fact, the stock’s been a better investment since 2015 than Amazon, Alphabet, and Meta Platforms.
The big question for investors is whether or not it can continue and I think there’s good reason for optimism. Its big competitive advantage is still pretty firmly intact.
Investment returns
In very simple terms, two things make stocks go up. One is a company generating more profits and the other is investors being more positive about future earnings.
When a rising share price is fuelled by optimism alone – especially when the stock goes up a lot – it can be a sign of a bubble. But this hasn’t been the case with 3i.
Over the last 10 years, earnings per share have grown from 73p to £3.97. That’s an average of over 18% a year, which is very impressive.
More importantly, this means the 3i share price has been mostly driven by growth in the underlying business. It’s not just the stock getting ahead of the company’s fundamentals.
Is it too late?
Obviously, buying the stock 10 years ago would have been a great idea. But it’s only natural to wonder how anything can still be a bargain when it’s 755% more expensive than it used to be.
This however, might be a mistake – a lot of 3i’s success since 2015 has come from its focus on investing its own capital, rather than raising funds from investors. And this is still the case.
Taking this approach has allowed the FTSE 100 firm to focus on investing when it thinks there are good opportunities around. In other words, being greedy when others are fearful.
I don’t think it’s any coincidence that 3i started taking this approach 10 years ago – almost exactly when the stock started its climb. And I think it could well have a long way to go.
Investing done right
One thing investors should note about 3i is that a lot of the company’s success has come from one investment. The firm owns a 57% stake in a European discount retailer called Action.
This has been an outstanding investment. But it does leave it open the question of whether – and how easily – the FTSE 100 firm can find other similar opportunities down the line.
The risk is that it might not be able to and that’s worth taking seriously. After the results of the last decade though, I think investors should consider giving it the benefit of the doubt.
