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I’ve been impressed with 3i Group (LSE:III) pretty much since I began looking at it. Shares in the private equity firm are up 302% since 2020, outperforming every other FTSE 100 stock.
The stock has been a winner, the business is strong, and the valuation looks reasonable. Yet, somehow, I’ve never bought the shares – and I don’t really have a good reason why.
A strong business
Private equity can be a volatile business. Returns are often huge when all is good, but when they turn around the situation can get ugly in a hurry.
The reason is straightforward – people naturally want to invest when they can see things going well. But when prices are high is exactly the wrong time to be thinking of buying things.
3i has a way around this problem of investors showing up with cash at the wrong moment. It focuses on investing its own cash, which gives it the flexibility to buy when the time is right.
The firm has been doing this since 2015. And – as it by magic – that’s when it went from being a volatile stock that trades sideways to something that has easily outperformed the index.
Valuation
That big advantage is still intact. And despite the outstanding performance from the stock, it’s currently trading at a price-to-earnings (P/E) multiple below 10.
On a price-to-book (P/B) basis, things are a little different. The stock is trading at a P/B ratio of 1.8, which is high compared to where it’s been over the last five years.
That reflects a degree of optimism. But 3i has an excellent record when it comes to generating returns on equity and I think this more than makes up for the elevated multiple.
In other words, it’s not valuation concerns that have stopped me buying the stock for my portfolio. It might have been better value before, but I think it’s still attractive today.
Why haven’t I bought it?
The reason I’ve never bought 3i shares before is relatively simple. I’ve always seen other things that looked like better opportunities to me.
There are clear risks with 3i. Its portfolio is heavily concentrated and there’s always the danger of overpaying for an investment – even the most disciplined investors do this sometimes.
That’s a consideration I take seriously, but it would be disingenuous to say it’s why I’ve never bought the stock. The reason is very much other opportunities elsewhere.
The volatile nature of the stock market means there’s always something that’s out of favour. And that’s not really been 3i in the time I’ve been looking at it.
What about now?
I’m not a believer in waiting for stocks to fall before buying them. There’s no guarantee this will happen and by the time it does, things might be different elsewhere in the market.
I do, however, think that the best way to build a diversified portfolio is to focus on the best opportunities at any given moment. And I’m not sure that’s 3i just yet.
My plan is to keep being patient with this one. But I’m not going to hold back if I think an unusually good opportunity presents itself.
