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Just a few months ago, 3i Group (LSE: III) was the most successful FTSE 100 growth stock I owned. Today? Not so much. But I still love it.
I’d watched its progress for years and, when I set up my Self-Invested Personal Pension (SIPP) in 2023 using the proceeds of some old company pensions, I finally had the cash to put my money where my mouth was.
I piled into the private equity and infrastructure specialist and was quickly rewarded, with the share price doubling in just 18 months.
Still, I wasn’t naive. I knew there was a big risk hanging over the stock and I’d warned The Motley Fool readers about it several times. In September, that risk finally hit home.
FTSE 100 star
3i has a superb record of buying companies and transforming them, stretching back to 1945. The recent share price surge was driven almost entirely by just one position, Europe’s fastest-growing non-food discount retailer Action. Its success meant it was worth around 75% of 3i Group’s entire portfolio.
The board bought a majority stake in 2011 and has overseen its expansion from 250 stores across three countries to more than 3,000 in 14. Action is still expanding, pushing into Switzerland and Romania.
Unlike many retailers, it’s benefitted from the cost-of-living crisis as shoppers hunt for value. Its ‘treasure trove’ format, offering up to 6,000 products, has proved a big hit.
But success comes at a price. With 3i shares up around 400% over five years at one point, it was trading at a 48% premium to net asset value (NAV). I did seriously consider taking some profits, but fatally delayed.
When I read 3i’s first-half results on 13 November, I breathed a sigh of relief. They showed total returns of £3.29bn, up 13% in six months, faster than the 10% achieved the previous year. Net asset value per share rose 12.4% to 2,857p.
The market response? A brutal 30% crash. That hurt, given my outsized holding, although over 12 months the shares are down a more modest 7%. And all it took was a suggestion that Action’s sales were slowing in France.
A better value opportunity
Short-term volatility is the price investors pay for long-term success, so instead of bemoaning my lot, I decided to turn the dip to my advantage and average down on 3i Group.
I’m not alone as 3i’s directors have been piling in at this price, led by chief executive Simon Borrows, who invested £1m. They clearly see it as a screaming buy and obviously, so do I.
There are signs of recovery but risks remain. As inflation falls, consumers may trade up, while Action’s success will inevitably attract competition. Longer term, 3i will also need to find its next big growth engine. I’m also curious to see whether it will take profits on Action. There could be a big dividend if it does.
3i Group isn’t for everyone. Returns can be bouncy, depending on acquisitions and sales. And it isn’t exactly cheap, trading at a 15% premium to underlying NAV. I’d suggest a minimum 10-year view and with that in mind, I think it’s well worth considering today.
