Occasionally someone will ask me how I discover good stocks to invest in. Truth is, I've not yet found an easy formula, screening criteria, or other method to separate the good investment ideas from the bad. Over the years, I've come to realize that my best investments have revealed themselves in strange places, at odd times, and in unpredictable ways. It has paid to keep my eyes open. Following is a true story about how I found one investment that has paid off in a big way.
Several years ago, I was setting up a small business, and figured I should have some business cards. A friend and fellow small business owner, Mark, told me rather enthusiastically about his good experience with a company called Vistaprint. Vistaprint allowed people to create and order business cards and other marketing materials online. So I checked them out, and also shopped around for other suppliers. I discovered that Vistaprint's offering was superior to those of its competitors, and soon I was added to the list of happy Vistaprint customers.
Then one day, I thought to myself, "I wonder if I can buy stock in Vistaprint." Sure enough, Vistaprint was trading under symbol VPRT (Note: in November 2014, Vistaprint's parent changed its name to Cimpress, symbol CMPR).
Once I had confirmed that Vistaprint was a publicly-traded company, I still had to perform additional research. I was a happy customer and already knew something about the company's brand awareness, as well as the competitive dynamics of its industry. But there were still many unanswered questions. For starters, I had not yet looked at the balance sheet, or read the annual report, or reviewed recent news articles. I also wanted to assess the quality of management. After performing additional research, I was almost (but not quite) ready to buy the stock. There was just one more step - I had to decide how much I was willing to pay.
When it came to Vistaprint's stock price, I got a bit lucky. By the time I finally got around to researching the company, a lot had happened. Management had released its full-year earnings and forward-looking guidance. In addition, management announced its plans to invest heavily in the areas of customer service, marketing, and manufacturing. Management was very forthcoming about short-term negative impacts to revenues and profits, as well as why it believed the moves made sense for long-term investors. Not too surprisingly, many analysts and investors were not at all happy about the changes. Vistaprint's stock was hammered, falling 37% the day following the announcement.
I had access to the same information as other analysts and investors, and was listening in on the conference call when management presented its radical plan. But I saw the situation differently. Many analysts saw the changes as negative and full of uncertainty, whereas I thought the changes planned by management made good business sense and clarified the long-term direction of the company. As a former CPA, I understood that accounting rules would require many of the proposed costs to be treated as current year expenses, even though these costs would improve the business many years into the future. Of course there was risk, but I figured the proposed investments were likely to result in the company enjoying bigger competitive advantages, more loyal customers, lower costs per unit of output, and bigger market opportunities. I was also quite impressed with Vistaprint's founder and CEO, Robert Keane.
As I mentioned, the stock had fallen a great deal following management's revelation of its new plans. Often stock prices fall for good reason, and it can be very dangerous to simply buy a stock because its price has moved lower. Sometimes, however, falling stock prices reflect investor misjudgments. In any event, what the price was yesterday (or last week or last year) is of no consequence to forward-looking investors. What is truly essential, is figuring out what one share of a company is worth TODAY, based on TODAY's situation, and comparing this value to what one share of stock is selling for in the stock market TODAY. Based on what I gathered of Vistaprint's business and future prospects, I had to determine for myself what I thought each share of stock was worth. Ultimately, I believed strongly in the company and its management, and I estimated a value far beyond its price at the time. So I decided to buy shares. I sent a Transaction Alert to our Premium Members, notifying them of my plans to buy Vistaprint, and giving them an opportunity to invest similarly to me in their own accounts.
At the time, Vistaprint's (the company's name is now Cimpress) stock was priced at around $27. Today as I write, the stock sells for $89 - a gain of 230%. On an annualized basis, the stock price has grown 29% per year, making this stock one of my more profitable investments over the past several years. I still own shares of Cimpress, and have a lot of fun following this very unique and interesting company.