I have cash available to invest in my Stocks and Shares ISA at the moment. And while there are some existing investments I could happily add to, I’ve also got my eye on a new addition.
FTSE 100 private equity company 3i (LSE:III) isn’t exactly a household name. But it’s been on my radar for a little while and with the stock falling today (15 May) this might just be my opportunity.
The latest results
The majority of 3i’s private equity portfolio consists of one investment – a 58% stake in a European discount retailer called Action. So in general, a lot comes down to how that business performs.
A key metric that I look at with retailers is like-for-like revenue growth. This measures how much sales are increasing adjusting for the effect of opening or closing new stores.
According to 3i’s latest update, Action has recorded like-for-like sales growth of 6.8% since the start of the year. And I think this is a key reason why the stock is down.
By itself, 6.8% revenue growth isn’t bad. Investors should note that it comes at a time when other UK retailers such as B&M European Value Retail and JD Sports have been seeing sales going down.
Importantly though, Action’s like-for-like sales growth in 2024 was over 10%. So the latest results mark a significant slowdown – and that’s not the issue.
3i values Action at around 18.5 times EBITDA, which is much higher than either B&M (5) or JD Sports (3). And slowing growth might cause investors to ask themselves whether or not this is justified.
Long-term strengths
3i has a lot of its eggs in a basket labelled Action, which makes it risky from an investment perspective. If the retailer underperforms going forward, returns could well suffer.
Despite this, 3i has been an outstanding investment over the last 10 years. The share price is up over 700% in the last decade, making it one of the FTSE 100’s top performers.
The secret to the firm’s success has been its ability to invest counter-cyclically. In other words, it has done a good job of buying when prices are low, rather than when they’re high.
For most private equity companies, this is easier said than done. Investors typically show up wanting to deploy capital when they can see good results – but that’s when stocks are expensive.
3i’s solution to the problem has been to invest its own capital, rather than taking in cash from investors. That allows it to wait for opportunities, rather than having to buy when prices are high.
This is a strategy that aligns closely with my own approach to investing. And this makes it a very natural investment to consider for my Stocks and Shares ISA.
Time to take Action?
3i shares might be up over 700% over the last 10 years, but the stock doesn’t look overvalued. It trades at a price-to-book (P/B) multiple below 2 and generates a return on equity of around 25%.
I don’t think that reflects much in the way of growth expectations. So if the stock stays below £40, I’m looking to make it the next addition to my Stocks and Shares ISA.
