The FTSE 100’s ‘secret’ growth share

Investors may be overlooking this FTSE 100 (INDEXFTSE: UKX) gem.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

3i Group (LSE: III) looks like a hidden star on the FTSE 100. The small and medium-sized private company investor reckons it runs a defensive portfolio of investee businesses with little exposure to the early repercussions of the Brexit referendum.

What’s more, around 70% of the firm’s assets are denominated in euros or US dollars and that has led to a translation benefit since sterling’s recent devaluation, which boosts the strong underlying performance the firm is reporting today with its half-year results.

With the business in such apparent good shape, net cash on the balance sheet and low gross debt, why is 3i Group’s valuation so low?

Should you invest £1,000 in Capita Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Capita Plc made the list?

See the 6 stocks

Too difficult?

At today’s share price of 615p or so, 3i trades on a forward price-to-earnings ratio of just over eight for the year to March 2018. The forward dividend yield runs around 3.8% and City analysts following the firm expect earnings to cover that payout more than three times. In today’s update, it says its net asset value stands at 551p per share — just 10% or so below the share price. The valuation looks attractive. Maybe too attractive, suggesting that investors might be worried about something.

I wonder if the firm’s business model might put investors off. 3i’s  history goes back to 1945 when it was set up to service a funding gap in Britain’s smaller enterprise sector. However, the company operates around the world these days, and a network of professionals apply their expertise towards developing the companies that 3i invests in. 

The firm targets what it calls mid-market companies with an enterprise value up to €500m, and new investment is focused on opportunities in Northern Europe and North America. It prefers to invest in the sectors of Business Services, Consumer and Industrial. On top of this private equity investment activity, 3i also invests in economic infrastructure and has a substantial debt management business.

Unlike straightforward trading companies, 3i is hard to see inside to judge how business might be going. Maybe that keeps the valuation low, or it could be that investors worry about cyclicality in the firm’s operations, or that currency advantages could reverse down the line if the pound strengthens.

An intriguing proposition

Yet 3i is upbeat about its forward prospects. Simon Borrows, the company’s chief executive, reckons it’s navigating the challenges of geopolitical and financial volatility from a position of strength. “Our diverse portfolio, rigorous investment processes and robust balance sheet underpin our confidence about the future success of the group,” he said.

3i like most companies has its challenges, with its Agent Provocateur investment currently suffering from slower consumer spending and unspecified accounting issues. But if the majority of its large and diverse portfolio of investee companies operate businesses that are truly defensive as suggested in today’s update, I think it’s an intriguing proposition selling at a modest valuation.

It’s hard for investors to diversify between several small companies on the stock market without building up trading costs. However, in 3i we have an opportunity to expose ourselves to the often larger upside potential of smaller firms while investing in a larger FTSE 100 firm that provides much better liquidity making it easier to get in and out.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Capita Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Capita Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Don’t panic as Warren Buffett retires! Just stick to the Oracle of Omaha’s method

The world's greatest investor Warren Buffett is finally retiring, but this isn't the end of his influence. It’s only the…

Read more »

US Tariffs street sign
Investing Articles

Up 10% in a month! Are the Scottish Mortgage shares the best way to play the tech stock recovery?

Harvey Jones is impressed by the resilience shown by Scottish Mortgage shares during recent turmoil. Should tech-focused investors consider buying…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Investing Articles

Is the HSBC share price an absolute steal at today’s levels?

The HSBC share price has had a terrific run despite the recent sell-off. Now Harvey Jones wonders if the FTSE…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

Start investing in the stock market this May with under £1,000? Here’s how!

Christopher Ruane explains some basics of how a stock market newcomer could start investing with under £1,000 and no prior…

Read more »

Fans of Warren Buffett taking his photo
Investing Articles

Is this a ‘Warren Buffett moment’ in the markets?

Warren Buffett has been doling out wisdom to shareholders this weekend. Our writer puts one well-known Buffett adage into current…

Read more »

Young woman holding up three fingers
Investing Articles

3 stocks Fools bought over 10 years ago and still hold

The Motley Fool’s approach to investing prioritises buying and holding quality stocks for long periods of time.

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

8.1% yield! Here’s the dividend forecast for British American Tobacco shares through to 2027

British American Tobacco shares have been a prized commodity for investors seeking a large passive income. Are they a potential…

Read more »

House models and one with REIT - standing for real estate investment trust - written on it.
Investing Articles

1 FTSE 250 stock trading well below book value

Stephen Wright thinks investors have a number of attractive possibilities with a FTSE 250 REIT trading at a discount to…

Read more »