Never fall in love with a FTSE 100 stock. It’s always wise to keep a clear head about these things. Real money’s at stake.
But I couldn’t help getting a little carried away by the performance of private equity specialist 3i Group (LSE: III) after adding it to my Self-Invested Personal Pension (SIPP) three years ago. It’s a stock that often flies under the radar, possibly because it’s an investment trust, and one with a specialist mission.
Launched in 1946 to help with post-war regeneration, its job is to buy up small companies, improve the business, and sell them on at a profit. The typical private equity routine. But 3i has turned out to be rather good at it. Possibly too good.
What went wrong with the 3i Group share price?
For years, it managed a balanced portfolio of companies. Today, there’s nothing balanced about it. It’s been upended by the outrageous success of one particular holding – European non-food discount retail chain Action. It doesn’t operate in Britain but you may have spotted its banner on your continental holidays, where it’s gone absolutely gangbusters with more than 3,000 stores.
The problem is that it’s left 3i Group performance almost entirely dependent on one holding. At some point, Action has to hit saturation point.
Investors feared we hit that point last year. Action was still making a heap of money, but sales growth slowed slightly. And that was enough to send the shares into a tail spin. I had doubled my money in 18 months, with dividends on top. Suddenly, I was sitting on a small loss.
And that’s despite averaging down twice last December. Today (25 June), I’m feeling a tad happier as the shares have jumped almost 10%.
Do today’s results mark a turnaround?
3i thrilled markets by reporting sales have grown 3.3% this year. That’s up from 2.4% growth in the 19 weeks to 10 May. The board also said it’s on track to open 105 new stores in 2026. It boasts a cash balance of £699m, despite paying a £450m dividend to shareholders in May.
All eyes are on Action, but it assured investors that “the remainder of the private equity portfolio continues to demonstrate good momentum in line with our expectations”.
Despite today’s jump, the shares are still down 45% over 12 months. The investment trust trades at a discount of almost 25% to the underlying value of its net assets. So there’s still a buying opportunity here.
Even as a fan, I’d say approach with caution. Action has to keep growing at pace, to keep investors happy. Crucially, 3i is now hoping to crack America, a notoriously difficult market. If it succeeds, profits and shares should soar. But if it fails? Ouch!
I wouldn’t suggest anyone think about buying it today as profit takers will almost certainly emerge after the early jump. Thereafter, it may be worth considering for investors who understand the risks. But don’t let your heart rule your head.
Should you invest £5,000 in 3i Group Plc right now?
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Harvey Jones owns shares in 3i Group.
