The FTSE 250 is full of great companies to invest in, and I think I’ve found another top one.
I’ve never bought a stake in a business like this before. It focuses on the sale and distribution of promotional products. For example, it sells merchandise for organisations, including pens, bags, mugs, t-shirts, and other items that can be branded as a marketing tool.
The name of the firm is 4imprint Group (LSE:FOUR), and here’s why I like it.
A growing enterprise
This company has been growing fast recently. Specifically, its earnings per share have been increasing at a rate of 27.7% as an annual average over the past three years. That’s in the top 30% of firms in its industry.
To reflect such exceptional growth, the share price has also been on a long-term rally, rising 698% over the past decade. That equates to an annual return of 70%. That’s remarkably competitive.
A tolerable balance sheet
Understanding if growth can continue depends on the amount of liabilities a company holds. If a company has too much debt on its books, it may mean that it is less able to finance future expansion strategies.
While 4imprint has more liabilities than equity, most of this isn’t typical debt but money that is owed to suppliers from products and services bought in advance. Usually, companies don’t pay interest on these types of purchases, making the balance sheet look a little stronger to me.
Valuation risk
Equally, with fast-growing shares, there’s always a concern that they can become overvalued. While I think the price for this investment isn’t too much of a worry, it certainly isn’t cheap.
As I write, the company has a price-to-earnings ratio of 20. I also looked at its future earnings estimates and compared its valuation to competitors. I think the shares might be trading at a fair price, just.
So the risk here isn’t that I’m buying something for more than it’s worth, but instead that I don’t have any margin of safety in the price if I buy.
Diversification risk
Also, 98% of all of 4imprint’s revenue comes from North America, meaning that if something severe affects this market, almost the entire business could crumble.
Additionally, the business doesn’t seem that diversified in what it produces and serves as operationally. That means that if demand in its core revenue-generating segment fails, it could also have a significantly hard time.
How I like to invest
This company looks good, but I like to invest with a margin of safety. Just like great businesses, I want a moat around my money, and I’m not sure 4imprint provides this.
In fact, while I think there’s a high level of growth to come from here on out, I could see a future where the business falls out of favour quite quickly. If I am going to take a stake in it, I’ll make sure it’s a small portion of my portfolio. Therefore, if something goes wrong, I have balance from my other investments.
That’s the power of great diversification when investing. As the Foolish (capital F!) way, it helps to make me sleep well at night, knowing that I don’t have all my eggs in one basket.
