When I buy a FTSE 100 stock, I aim to hold it for the long term. That was certainly my intention when I added private equity and infrastructure specialist 3i Group (LSE: III) to my Self-Invested Personal Pension (SIPP) in 2023.
It was a stock I’d wanted to own for years, but I had one concern. The shares had already done so well that I feared I was arriving late to the party.
I went big anyway. 3i has a superb track record stretching back to 1945, buying businesses, improving them and selling them on at a profit. My worries were quickly soothed as the shares kept climbing, soon doubling in value and becoming the best-performing FTSE 100 stock in my SIPP. But then another concern crept in.
3i Group shares are flying today
For several years, 3i’s recovery has been driven largely by a single holding: European non-food discount chain Action. It’s been a phenomenal investment. Since acquiring a majority stake in 2011, 3i has overseen Action’s expansion from 250 stores in three countries to more than 3,000 across 14. It’s still growing fast, pushing into Switzerland and Romania.
Action has thrived during the cost-of-living crisis, as shoppers hunt for value among its ‘treasure trove’ of 6,000 cut-price products. Yet it now completely overshadows the rest of the portfolio, which simply hasn’t matched its success.
Now I’m wondering about 3i’s exit strategy. Or whether chief executive Simon Borrows even had one. Also, 3i looked expensive, trading at a hefty 48% premium to net asset value.
Those fears came to a head on 13 November, when an otherwise solid set of half-year results included a slight slowdown in Action’s French sales. The shares plunged 30% in a single day. Clearly, I wasn’t alone in my unease.
Then I noticed Borrows had taken advantage of the slump to invest £1m of his own money into the stock. That’s a big vote of confidence. I followed him in. Sadly, with a far smaller sum.
Glad I bought the dip
Today, that decision looks justified. The 3i share price jumped 14% this morning after Action reported 6.1% like-for-like sales growth in the first four weeks of January, despite ongoing challenges in France. It’s still down 17% over one year though.
Borrows hailed Action’s “impressive growth trajectory”, noting it opened a record number of new stores and delivered double-digit annual sales and earnings growth, with new locations Switzerland and Romania outperforming expectations.
3i also boasts a strong balance sheet, with £995m of gross cash and gearing of just 1%. As for an exit strategy, forget it. The board increased its stake in Action to 65.3%, up 2.9%.
I’m delighted I bought the dip. I paid £32.17 in early December. Today, the shares trade at £35.94, almost 12% higher. But mostly, I’m pleased because I stuck to my wider strategy: buy for the long term and consider buying more in a dip. I won’t buy even more after today’s surge though. The shares may retreat as profit takers emerge.
Action looks like it’s got plenty of growth capacity, but anyone considering 3i needs to understand what they’re buying. Action, not 3i. That’s a problem for a later date. For now, I’m enjoying the ride.
