More woes may loom for growth traps

Prior to reporting earnings last week, investors in Snapchat parent Snap must have hoped a lot of bad news was already reflected in the price, given shares had already fallen over 70 per cent. Instead, they learned things can always get worse, with the stock crashing 35 per cent in a single day after reporting disappointing earnings.

Like Snap, more woes may be ahead for other fallen growth stocks, according to GMO’s Ben Inker. Ten months ago, Inker wrote about the dangers of growth traps, high-flying companies that fall short of heady revenue expectations. In a typical year, Inker warned, about 37 per cent of growth stocks turn out to be growth traps. When such companies miss expectations, he noted, they invariably suffer brutal share price falls.

The prevalence of growth traps over the last year has not been noteworthy, says Inker, with 26 per cent of the growth universe falling into this category – below the long-term average. However, their average underperformance over the last 10 months has been record-breaking, even worse than that recorded during the bursting of the dotcom bubble.

Does that suggest a bottom might be near? No, says Inker. Although long-term growth forecasts for the median-growth stock have fallen sharply, they remain much higher than usual and are as high as they were at the peak of the internet bubble in 2000.

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Stubbornly high expectations mean there will likely be more growth traps in the next year than in the last one and underperformance will remain worse than usual, says Inker, “until a full unwinding of the growth bubble occurs”.