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There are some terrific businesses listed on the UK stock market. Unfortunately, opportunities to buy shares in them at attractive prices don’t come around often.
When a stock has been rising, it can look like the chance has gone. But this isn’t always the case — a growing business can be worth a high share price.
3i
3i (LSE:III) shares are trading at an all-time high, which suggests now isn’t a good time to consider buying the stock. But I don’t think investors should be too quick to conclude this.
Five years ago, the stock was at an all-time high. And since then, the share price has climbed 250%, making it – without exception – the best-performing FTSE 100 stock of the last five years.
There are two reasons for this. The first is the private equity firm invests its own cash rather than taking in outside money, which allows it to buy when prices are low.
The second is its largest investment – a discount retailer called Action – has managed some very strong growth. But while these look like durable strengths, there are also risks.
To my mind, the most obvious risk is the possibility of the firm making a bad investment. 3i has shown exceptional discipline, but even the best investors make mistakes.
With its competitive advantages intact, however, I think investors should take a close look at the stock. Dismissing it because the share price is high has historically been a bad idea.
Informa
Informa (LSE:INF) is another interesting case. The company runs some of the world’s largest trade shows, conferences, and exhibitions.
The names might not be familiar to industry outsiders, but attendance is essential for business owners. And these brand assets can generate significant cash for the FTSE 100 company.
Not owning the venues it hosts events in means Informa doesn’t have the maintenance costs of them. It also collects fees before settling its costs, giving it attractive working capital dynamics.
As a company that brings together international businesses, the threat of trade wars is a risk. And it should be obvious that this is especially relevant at the moment.
Informa, however, has been through tough situations before. Covid-19 was arguably the biggest challenge an events company could have faced and the stock reflected this at the time.
Given this, investors might think the time to consider buying the stock has passed. But the quality of the underlying business means I think it’s still worth considering seriously.
FTSE 100 winners
Warren Buffett says that paying too much for a stock up-front can offset the effects of 10 years of strong business returns. And I think this is absolutely right.
The fact a stock is trading at an unusual level, however, doesn’t necessarily mean it’s one to avoid. With 3i and Informa, I think these are worth considering despite their high prices.
