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If you’d asked me what my favourite UK growth stock was a year or so ago, I’d have replied 3i Group (LSE: III) quick as a flash.
It was the first FTSE 100 stock to double my money after I started loading up my Self-Invested Personal Pension (SIPP) in May 2023. I’d invested a large sum so it quickly became the biggest single position in my entire SIPP. Then suddenly, it went wrong.
The specialist private equity investment trust was launched in 1946 to provide long-term capital and equity to smaller and medium-sized businesses. Lately, it’s become a slightly different beast. That’s because one particular holding, European non-food discount retail chain Action, has flown like no other.
What has it done so well?
Action has spread rapidly across the continent and now boasts more than 3,000 stores. Today, it makes up roughly three-quarters of 3i Group’s £32bn portfolio. Where Action goes, 3i’s performance now slavishly follows.
This was bad news when signs emerged last year that growth was slowing in its key French and German markets. While 3i Group was still making big profits and paying generous dividends, the shares crashed in half. My 100+% gain was reduced all the way back to zero.
I told myself that markets had been too hard on the stock and topped up my stake last December and again in January. 3i directors were also filling up their boots, which encouraged me.
The shares had further to fall but are now recovering. On 25 June they jumped 10% after the board said Action’s sales had jumped 3.3% so far this year. This morning they bounced another 6% after the retailer reported a total first-quarter return of 3%, despite negative currency movements. In the six months to 28 June, operating EBITDA earnings jumped a healthy 13% to €1.1bn.
Action now boasts 3,423 stores, having added 121 in six months, and is on track to open at at least 400 stores this year.
3i has a strong balance sheet with gross cash of £724m and minimal gearing of just 2%. It’s also running a £750m share buyback.
How risky is this stock?
Despite today’s bump, the shares are still down 40% over the last 12 months. It now trades at a 16.8% discount to underlying net asset value, compared with its 12-month discount of 12.9%.
There’s also income on offer, with a trailing yield of 3.1%. The group pays a final dividend of 48p per share tomorrow and I will automatically reinvest mine to buy still more of its stock.
There are risks. As we’ve seen, the shares can be volatile, and investor expectations are high. Even the slightest slowdown in sales and earnings will be punished. The biggest danger is that the board now has hugely ambitious plans to crack America, which is a notoriously tough market to break into. If it succeeds, the rewards could be exponential. But if it fails, the shadow could hang over 3i’s share price performance for years. It’s exciting and worth considering for growth investors but crikey, it’s also risky!
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Harvey Jones owns shares in 3i Group.
This story originally appeared on Motley Fool
