It can be hard to buy stocks when their prices are going down. We all love a bargain but few want to buy something that may well be cheaper tomorrow or next week.
But investing at times like these can be the key to earning huge returns. And I think there are some terrific opportunities within the FTSE 100.
A FTSE 100 titan
One of the best examples is 3i (LSE:III). Over the last 10 years, the private equity firm has been one of the FTSE 100’s top performers and it’s easy to see why.
The company’s book value – the difference between its assets and its liabilities – has grown by 21% a year on average. And it isn’t showing signs of slowing.
Source: Fiscal.ai
A lot of this is due to Action, 3i’s largest investment. The European retailer has grown strongly through a mix of new openings and higher same-store-sales.
As a result, Action makes up more than 70% of 3i’s portfolio. That’s a lot, but it’s not a problem while the business is performing well.
Iran conflict
As a result of the conflict in Iran, Qatar has halted liquefied natural gas (LNG) production. And that’s a problem for Europe, which imports it.
Higher energy prices are likely to create pressure on household budgets. But that’s bad for Action, which relies on consumer spending for its revenues.
3i values its stake in Action at an EBITDA multiple of 18.5. That’s not outrageous, but it implies a positive view of the firm’s future growth prospects.
A reputation for low prices should help make Action more resilient. But given how much of 3i’s portfolio it makes up, investors need to take note of the danger.
Stock down
The risk of LNG-related disruption is real, but I don’t see it as a long-term threat to 3i’s key subsidiary. And I think the discounted share price offsets a lot of this.
Just one month ago, the stock was trading at a price-to-book (P/B) ratio of 1.2. After a 15% decline in the share price, that multiple is now 1.
I think that’s cheap. I started buying the stock at a P/B ratio of 1.2 with a view to the firm growing into its valuation within a year.
I’m still happy buying it at that level, but I like it even more at today’s prices. Especially with 3i’s long-term competitive advantage intact.
Buying opportunities
3i’s key advantage is that it invests its own capital, instead of funds from clients. And that means it can buy and sell when it chooses, not on fixed timelines.
That gives the company a huge advantage over other private equity firms. And LNG disruption doesn’t make any difference to this.
In the short term, there’s no rule saying the stock can’t fall further. It’s traded at a P/B ratio below 1 before and it absolutely could do so again.
From a long-term perspective though, I see the current disruption as an opportunity. And that’s why it’s on my buy list right now.
