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Growth traps: Why investors should be wary
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.
There’s a bunch of investors out there who are willing to pay any multiple for growth and I think that will end badly.
If you think back to the 2000 tech wreck, companies like Microsoft and Cisco, they were quality companies, they kept delivering growth over the next decade, but guess what? Their share prices fell. Share prices fell because investors paid the wrong starting multiple.
Everyone is very aware of the value traps today, what they’re not paying enough heed to are the growth traps, the growth purgatory – when markets sort of start to think about maybe the sustainability of some of these disruptive business models which are not actually that sustainable. Or they worry about just what the right multiple is in a different interest rate environment.
Whilst Antipodes Partners Limited (ABN 29 602 042 035, AFSL 481 580) believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distribution and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so in light of their specific investment objectives and financial situations. Any person considering action on the basis of this communication must seek individual advice relevant to their particular circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws, Antipodes Partners Limited disclaim all liability to any person relying on the information contained on this website in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information.
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Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 is the product issuer of funds managed by Antipodes Partners. Any potential investor should consider the relevant Product Disclosure Statement available at www.antipodespartners.com/funds in deciding whether to acquire, or continue to hold units in a fund. The issuer is not licensed to provide financial product advice. Please consult your financial adviser before making a decision. Past performance is not a reliable indicator of future performance.
20 February 2020 Jacob Mitchell, Chief Investment Officer
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