InvestNow News – 12th June – Antipodes – Growth traps: Why investors should be wary

20 February 2020 – Jacob Mitchell, Chief Investment Officer

The collapse in real yields has led to the systematic outperformance of high growth stocks, a situation in which we believe could lead to investors being caught out by growth traps.

The price performance of high growth stocks versus lower multiple stocks has never been more extreme, widening significantly over the past thirteen months as negative real yields distort the valuation of long duration assets.

We’re not saying don’t buy growth equities, we’re just saying make sure you’re buying them at the right price.

Just like there are value traps, there are growth traps and there are quality traps. We all know what value traps are; stocks that are trading on a low multiple because they are being permanently impaired by competition. A growth or quality trap is a stock which is unable to live up to the market’s unrealistic growth expectations, therefore it de-rates.

To avoid growth traps, investors should consider placing more emphasis on starting valuations of stocks they’re considering adding to their portfolios.

As multiple dispersion has widened across all sectors, and is now approaching the extreme levels of the tech bubble, we have to be selective by choosing high quality businesses – be it growth or value – trading on attractive starting multiples.

At Antipodes, we believe growth, along with value traps will be prevalent going forward.