Growth investors often place too much emphasis on positive news flow to the detriment of other growth stocks that have been recently affected by negative news flow but offer similar prospects.

1. Growth investors attach too much importance to news flow.

We often find that companies held by growth-oriented portfolios have a positive news flow and offer but which are valued for comfort

• This derives from the fact that it is more comfortable to have companies which are very conservative because they tend to pleasantly surprise investors (Hermes, ASML, L’Oréal). 

• It is considered smart to own companies that have recently performed well, reassures shareholders and follows the consensus (e.g. LVMH: has 18 buy and 4 sell recommendations).

2. Growth stocks have competitors with the same outlook but who have been affected by what are often temporary problems.

• Ryanair vs. EasyJet: both have similar growth profiles, but EasyJet was affected by logistical issues at Gatwick airport and a ' turbulent ' core shareholder. 

• Richemont and Remy Cointreau vs. LVMH: 3 years ago, Richemont and Remy Cointreau suffered a setback as a result of anti-corruption programs in China affecting watches, jewellery and high-end Cognac whilst LVMH was perceived as a more diversified and therefore safer investment. 

• Nokia vs. Ericsson: 2 years ago, Ericsson was considered a pure play on 5G mobile deployment, enjoying a strong market share in China and the United State, while Nokia was considered a hybrid value (mobile and fixed) with minimal Chinese exposure. 

3. The evolution of these companies has shown us that from an it is interesting to look at companies that have recently experienced some setbacks, but which are operating in growing sectors.

If a growth stock can overcome the issue (or the perception) of a cyclical problem, the investor captures not only the new growth prospects but also the multiple re-rating: 

• Remy Cointreau: In January 2020, Remy Cointreau was trading below 100 euros, a price comparable to that of the aging process for Cognac barrels used to mature Louis XIII cognac. This was compounded by the prediction that the new CEO, Eric Vallat, would revise down the outlook given by his predecessor. Lastly, the company was affected not only by anti-corruption fears in China but also by the risk of over-storage at distribution levels. Yet…since February 2020, Remy Cointreau, who had underperformed Pernod and Diageo from 2016 to 2019, has outperformed Pernod Ricard by 300% since January 2020.

• Nokia: In January 2021, the consensus was that Nokia was less well positioned than Ericsson on 5G, its new CEO having revised Nokia’s targets down in the third quarter of 2020. Nokia stock was trading around 3 Euros. The Covid-19 pandemic and the skyrocketing rates of homeworking revealed the benefits of Nokia’s business model: a combined offer (fixed and mobile) and greater exposure. This has been compounded by the realisation that China is a much less promising market for non-Chinese operators in 2021, to the detriment of China exposed operators such Ericsson who have since lagged behind Nokia (Nokia’s +60% performance against Ericsson).

4. The outlook for contrarian growth investors 

Even if overperformance is not systematically present (e.g. the 20% underperformance of EasyJet against Ryanair this year), we believe that over time this will change. Why?

Simply put, growth investors who are “momentum” are often opposed to value investors who are contrarians. Yet perhaps there is a narrow path of outperformance for growth investors who are contrarians.