Shares for the future: four stocks facing the axe from my top 40

Before the reporting season gets into full swing, I am taking stock. The publication of an annual report is the trigger for me to score a share, and I want to make sure that I am scoring the right ones. 

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There are two basic reasons for a low score. The first is the share price is very high compared to the company’s historic earning power. The second is the company is of dubious quality, as defined by the criteria I score: dependability, distinctiveness and direction. 

Of these two sins, the latter is the most heinous. My goal is to populate the Decision Engine with high-quality businesses and hold a greater value of shares in those with the lowest prices in the Share Sleuth portfolio. 

An occasional clear-out is needed to keep the quality high. 

Rather than reappraise shares already at risk when they next publish their annual reports, I want to find substitutes that I feel more confident about.  

The plan is in the table below. It shows the score of each share at risk. Since the deadline for switches is the annual appraisal date of the “at risk” share, I have ordered the table so that the companies reporting soonest are at the top. This is the trigger date for reappraisal or for finding a replacement. 

Since I last scored these shares some time ago, I need to make sure I still feel the same way. Here are my reasons for dropping them: 

Ex P Power 

I once rated XP Power Ltd (LSE:XPP) very highly. The company makes power converters for industrial and healthcare equipment. For many years it grew steadily by inventing product families that could be easily customised and incorporated into the design of its customers' machines.  

Its decline probably started when it went on the acquisition trail to broaden its converter range. One of its newly acquired subsidiaries perpetrated IP theft according to a court judgment.  

The ensuing damages added to acquisition costs have left the company heavily indebted and unable to finance investment. Lower demand across all its main markets could not have come at a worse time. 

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While XP Power says sales have fallen due to prior overstocking by customers, a temporary echo of the pandemic and war, redundancies and reduced investment may have affected its competitiveness over the long term.  

XP Power’s impressive history before these events no longer gives me confidence that it deserves a place in my top 40.  

Not Next 

Judging by the numbers, Next (LSE:NXT) deserves its place in the Decision Engine. It has not only survived the high-street apocalypse and the assault of fast-fashion brands but remained highly profitable throughout. The company and its chief executive are widely admired. 

The likely expulsion of Next from the Decision Engine says as much about me as it does about Next. I have hurled myself at the annual report year after year, yet I cannot link the numbers to the narrative. I do not understand what makes it so profitable.  

Although the year to January 2025 will be a humdinger, Next has grown very slowly over the past decade. Following its many growth initiatives as each year it kills off some, changes the emphasis of others, and incubates yet more, is like wrestling an octopus.  

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Every year I am exhausted, unsure whether I have learned from the experience. I need a break, so for my own sanity and perhaps yours, I am inclined to drop Next, perhaps only for a while. 

Comes a Cropper 

The headlines write themselves. The venerable paper maker Cropper (James) (LSE:CRPR) has stuck by its paper business despite recurring losses.  

Having evolved a profitable advanced materials business from its paper-making methods, it has segued into hydrogen, a fuel of the future. It supplies companies making fuel cells that store hydrogen and electrolysers that make it. Demand has yet to justify James Cropper’s investment though, because large hydrogen infrastructure projects have been delayed due to cost and uncertainty. 

With only one part of the business growing profitably, the other two holding it back, and James Cropper’s finances somewhat stretched, I think the share is too speculative for the Decision Engine. 

Currency calamity 

PZ Cussons (LSE:PZC) is another forward-looking company that has been stymied by its history. 

The company traces its origins back to a trading post in West Africa, and economic turmoil in Nigeria has plunged the company into heavy debt. A meltdown of the naira, the Nigerian currency, has devalued its assets in one of its biggest markets. 

PZ Cussons already had its hands full defending a stable of consumer brands from copycat products sold by discount retailers, and greater choice made available by the internet and social media.  

I thought the company’s strategy to simplify and focus on its most differentiated brands was coherent, but I was completely blindsided by the currency meltdown in Nigeria, which happened when the Nigerian government abandoned exchange rate controls. 

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Rather like XP Power and James Cropper, it is the multiplicity of challenges that has made PZ Cussons too speculative for the Decision Engine. I can no longer be confident that these shares will prosper through thick and thin. Indeed, things are thin now, and it is not prospering. 

I may change my mind about these shares, but replacing one tenth of the Decision Engine every year seems like an appropriate level of renewal for a long-term investor. 

22 Shares for the future 

Here is the ranked list of Decision Engine shares. I review the scores at least once a year, soon after each company has published its annual report. The price scores are calculated using the share price prior to publication. 

Generally, I consider shares that score 7 or more out of 10 to be good value. Shares that score 5 or 6 out of 10 are probably fairly priced. 

Scores and stats: Richard Beddard. Data: ShareScope and annual reports 
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price) 
Shares marked with an asterisk (*) have been re-scored, click the asterisk to find out why. 

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.  

Richard owns many shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares. 

For more on the Decision Engine, please see Richard’s explainer. 

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard