XP Power: One that got away edition

Ten bagger be gone

I was talking to John Mulligan last week about XP Power, a company he discovered well before me and stayed with a lot longer. John started out in the City during the Cuban Missile Crisis, so he’s a ready source of wisdom.

Anybody who bought shares in XPP near its bottom just two years ago would have made a lot of money. The shares  are up well over 1000%. It pays a growing dividend too.

Ten baggers are like 40lb pike, rare catches, and something to boast about but my participation in the rise of XPP is less remarkable. You can see it on this chart grabbed from Sharescope:

I added XPP to the Thrifty 30 at 432p in March 2010 (green ‘B’ on the price line) and removed it from the portfolio five months later in August for 737p (pink ‘S’ on the price line). The price gain was 71%.

It’s doubled since. Obviously John and I talked about our different approaches.

I explained that once a share looks overvalued I usually remove it from the portfolio and put the money to ‘better use’ in a more undervalued company. It doesn’t mean I think the price will start falling, it means I’ve lost the ability to tell whether it should go on rising. A bit like a ship might lose its way in the Bermuda Triangle when its compass goes awry, my tools fail me when shares become very popular. XPP shares cost 22 times average earnings, and I had lost my bearings.

John explained that he’d followed the company since its flotation eleven years ago. He’d got to know the chief executive and other directors, had a good understanding of the business and how a change of strategy had transformed its prospects.

I’d read the annual reports, and knew the facts, but I didn’t have the same level of confidence as John because I was a latecomer to the company.

I don’t think I made the wrong decision, even though history shows International Greetings, the company I switched to, has not yet made the Thrifty 30 much money.

Had I known what John knew first hand, I might have stuck with XPP. But I didn’t. XPP rose so fast it was out of my comfort zone before I had time to get comfortable with it.

Things might have been different had I implemented an incidental change of policy in time. I no longer reappraise companies when they rise 50%, I just reappraise them once a year when they publish their annual reports.

The change is meant to stop me price-watching so I can spend more time investigating companies, but in XPP’s case it would have made me a better trader too.

XPP is due to publish its annual report this week. I’m sure if I still held it in the portfolio I’d be removing it now despite the fact the business is still performing, but more by luck than judgment I’d have captured more of the value.

David, this one’s for you.