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I’d forget the FTSE 250 and buy this growth stock instead

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Last month, I said that I would have no issue buying shares in FTSE 250 critical components supplier XP Power (LSE: XPP) before it releases interim results. Based on today’s numbers, it would appear this was a good call.  

“Continued strength”

Thanks to “continued strength” in the semiconductor manufacturing equipment sector and a rebound in industrial technology, revenue was 14% higher over the first six months of 2021 compared to the previous year.

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XPP’s bottom line fared even better. Reported pre-tax profit came in a whopping 59% higher at £16.4m. That’s a fine result on its own. However, it’s particularly good given that trading from the healthcare sector normalised as expected. 

At a time when some companies are being hurt by inflation, existing holders may also be comforted by news that XP’s gross margins rose slightly over the period (to 46.6%). This was in part thanks to the company switching manufacturing to Asia during last year’s crisis.

Ahead of expectations

With an order book of over £150m, XP is predicting that the recent trading momentum will continue into the second half of its financial year. As a result, the Singapore-based business now thinks its full-year results will be “modestly ahead” of what analysts were forecasting. Naturally, investors would probably prefer words like ‘materially ahead’. However, this does provide management with a bit of wiggle room if trading turns out to be better than expected.

As a further sign of confidence, XP announced today that it would be returning 37p per share in dividends to owners for the half year. This represents just over double what holders received for the first half of 2020. 

FTSE 250 beater?

XP’s share price has significantly underperformed the FTSE 250 over the last year. In other words, investors could have achieved a far better return by simply buying a passive fund that tracks the return of the index.

Then again, one gets a completely different perspective when looking at performance over a longer time period. From July 2016 to today, XPP’s share price has climbed a little under 220%. The FTSE 250 is up just 33%. This shows how deviating from tracking the index has the potential to dramatically improve my wealth over the medium to long term.

While we can’t assume that investors will get similar gains going forward, XPP’s growth prospects do look compelling. Today, Chairman James Peters remarked that the company had “exposure to secular growth trends related to Big Data, Artificial Intelligence, the Internet of Things and the Fourth Industrial Revolution”. New products and markets give the company “the potential for further market share gains”, he said.

This is not to say that XPP is devoid of near-term obstacles. Issues connected to the supply of components may continue. Increased freight costs are already starting to have an impact, according to the company.

As stated last month, the shares aren’t exactly cheap on 27 times earnings either. One suspects highly-rated shares like XPP could be hit hard if the global economic recovery were to slow.

Top growth stock

Taking into account its potential, great margins, ‘sticky’ clients and sound finances, however, I’d buy this stock over a FTSE 250 tracker today. 

As far as growth stocks go, I reckon XP Power is up there with the best of them.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended XP Power. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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