ICG Enterprise Trust (LSE:ICGT) is one of the longest-standing constituents of the listed private equity sector. I am hot on this investment trust because of its purpose to generate consistent and resilient total returns across economic cycles. 14 consecutive years of double-digit underlying portfolio growth confirms this. Frankly, I’d quite like this beacon of consistency in my portfolio amid the ups and downs of the market. It helps that it looks as cheap as chips, too. It’s definitely worth assessing whether it is the number one stock for me to buy this month.
Bargain season
I discern whether a stock is a bargain by looking at its relative valuation and future earnings growth potential. My signals are bullish on both counts for ICGT.
Firstly, with a price-to-earnings ratio of 12 times, ICGT is cheaper than its peer average (14 times). It also has a cheaper valuation than the FTSE All Share (14.5 times). Secondly, its portfolio earnings are forecast to grow 35.4% per year. That’s a pretty high growth projection. So, I am scratching my head as to why the trust has a widening price discount relative to its assets.
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Discounts
In fact, the entire listed private equity sector is trading at historically wide discounts. It’s at odds with strong returns the sector has delivered over the years. ICGT could be one of the worst-hit victims.
Michel Degosciu, founder of specialist research and advisory firm LPX AG, believes the stock is trading at a “significant undervaluation based on the current discount level”. At last glance, the shares were trading at a 40% discount to assets. This comes despite the bullish projected performance of its underlying portfolio.
As a bargain hunter I obviously find this attractive. But I know all too well that discounts can be a poisoned chalice. The fact that demand for the shares is at a relative low is not a ringing endorsement in my eyes. The share price has been in freefall since February following a strong start. Degosciu attributes this to investors pricing in the impact of higher interest rates on its portfolio.
Admittedly, the trust has a high level of gearing (borrowing). This could limit the scope of the discount narrowing, particularly if its underlying assets get devalued.
Long-term outperformance
Regardless, the stock’s historical outperformance of the UK equity market is stark. Intermediate Capital is a big player in the direct private mezzanine sector. Its “historical track record in the mezzanine sector is very good”, according to Degosciu.
Additionally, the trust’s bias toward defensive growth companies is a positive for me. I feel this has contributed to its resilient NAV performance with companies that can grow earnings in today’s tough conditions.
All in all, I view the firm as a heavily discounted growth company that pays healthy dividends. In addition to income, the company has a long-term share buyback programme.
It’s a generous mix and suggests to me that the company’s helm have a bullish outlook. I am similarly bullish, and the stock is on my watchlist currently. It’s too cheap not to be. I just need to monitor the discount. If it continues to widen, the less likely I’ll be to purchase. Vice versa if it narrows.
