3i Group (LSE: III) and Marks and Spencer (LSE: MKS) have been two of the best-performing stocks in FTSE 100 this year. As I write this in late December, they’re up 48% and 40% respectively, year to date.
Can these red-hot stocks smash the market again next year? Let’s discuss.
A hot industry
Starting with private equity and infrastructure company 3i Group, I see many reasons to be bullish as we head towards 2025. For starters, private equity’s a really hot industry right now. All over the world today, high-net-worth investors are diversifying into alternative investments and private equity firms like 3i are benefitting.
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Secondly, the company has plenty of momentum. One key driver here is Action – the European discount store chain 3i owns around 80% of. For the six-month period ended 30 September, Action’s sales were up 21% year on year. Meanwhile, EBITDA was up 26%.
Action is the major contributor to our returns and continues to produce sector-leading growth. With a strong business and financial model and significant white space to expand into, we believe it will continue to do so for many years to come.
3i Group half-year report
It’s worth noting that in the group’s recent H1 report, it said it has a good pipeline of high-quality realisations (disposals) for the next 12 months. It also said it has interesting potential opportunities in its investment pipeline.
Finally, the valuation remains low. Currently, the price-to-earnings (P/E) ratio here is only 7.1. That compares to 40 for Blackstone, 20 for Apollo Global Management and 12 for Carlyle. Given the super-low valuation here, I wouldn’t be surprised if another company tried to buy 3i Group.
Putting this all together, I believe 3i shares have the potential to outperform the Footsie again in 2025 and are worth considering for a portfolio today. Assuming financial markets don’t freeze for some reason (a scenario that could hurt private equity firms), I think this company will continue to perform well.
Doing great things
As for Marks and Spencer, I have a little less conviction here. I do still like the company from an investment perspective. Right now, Marks and Spencer is doing great things in both food and clothing.
And revenues and profits are climbing as a result. For the year ending 31 March 2025, revenue and earnings per share are projected to rise about 5.6% and 16% respectively.
However, after the big share price rise this year, the valuation isn’t as attractive as it was. Currently, the P/E ratio’s 13.3 and that doesn’t leave a huge amount of room for multiple expansion, in my view.
Another issue to consider with Marks and Spencer is rising costs due to the recent National Insurance and minimum wage changes announced in the UK Budget. In November, the group said that it could face extra costs of around £120m next year.
Given that net profit last financial year was only £431m, that could be quite a big hit.
Given the valuation and cost risks, I’m not expecting huge returns from this stock in 2025. It could still outperform the FTSE 100 index though, so I think it’s worth considering.
