The Motley Fool

2 stocks I bought for 2017 and why

For weeks, before my new SIPP funds became available, I’d been banging on in articles about the attractions of private equity and infrastructure investor 3i Group (LSE: III)

So, when the funds I was moving from another pension provider finally hit my SIPP account, I wasted no time in buying a slug of 3i shares for the portfolio.

Stirring the entrepreneurial spirit

I have to admit, the firm’s business stirs the entrepreneurial spirit within me. Most of 3i’s income comes from pursuing a strategy of investing in what it calls mid-market businesses then drawing on an international network of professionals to guide investee firms on to accelerated international expansion.

3i targets firms with enterprise values typically between €100m and €500m within the sectors of Consumer, Industrial, and Business & Technology. By working with the entrepreneurs and management teams that run these smaller enterprises, 3i aims to first get the business basics right, then to set strategic priorities for the next thrre-to-five years and finally to execute the plan.

By aiming to back international growth plans and setting investee firms on a trajectory of accelerating improvements in earnings, 3i benefits as its net asset value increases both while holding an investment and when selling it. Once 3i has turned a business into a leaner, faster-growing beast, it tends to sell out of the investment and move on to the next, so holding periods tend to be less than 10 years or so.

Impressive returns

It does not work every time, of course. But the compound annual growth rate (CAGR) of 3i’s dividend has been running at around 44% over the last five years or so. The company’s successful private equity business model is delivering real returns for investors like you and me.

At today’s share price around 715p, the price-to-book value is around 1.31 and the dividend yield sits near 3.3% for 2017. I think 3i’s successful strategy could power further total returns for investors from here.

As well as 3i, some of my new SIPP funds went to public transport provider Go-Ahead Group (LSE: GOG). The firm’s rail division operates the GTR, Southeastern and London Midland franchises through a 65% owned subsidiary Govia, and the bus division operates services in London, regional routes and overseas in Singapore.

Boring but steady

I’ll admit that Go-Ahead’s business doesn’t seem as exciting as 3i’s, but the firm sports an attractive blend of value, quality and share-price momentum. Sometimes boring businesses with essential services can deliver steady returns for investors, and that’s what I’m hoping for from Go-Ahead.

At today’s share price around 2,298p, the price-to-earnings ratio runs around 10.5 for 2017 and the forward dividend yield at 4.5%. This valuation doesn’t seem stretched and the firm’s forward workload strikes me as potentially steady. Such characteristics could help explain the stock’s steady upwards momentum.

Growth at a reasonable price

3i and Go-Ahead could prove to be under-priced and both firms are well worth your own research and due diligence right now.

Another promising growth opportunity features in a special report called  A Top Growth Share From The Motley Fool.

The Fool’s analysts identified this firm’s compelling growth prospects after searching the market for opportunities. The research is free to download and you can get it right now by clicking here.

Kevin Godbold owns shares in 3i Group and in Go-Ahead Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.