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Growth stocks increase in popularity

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18/01/2008

One of the most marked trends of recent months has been a shift in investor preference for growth stocks at the expense of value, according to European Assets Trust.

It says that broker analysts have been extrapolating forward healthy future earnings growth on swathes of cyclical stocks on the back of the last few years of strong growth.

Manager Crispin Longden said: “The result is that while these stocks appear expensive based on historic earnings numbers, they continue to look cheap on future estimates. That is, they are seen as having the characteristics of growth stocks.”

However, Longden believes the case for continued performance from cyclical stocks falls down in two respects.

He added: “First, analysts are wrong to draw from a company’s recent earnings history. They should delve back at least to the last cyclical downturn in the early years of this century or even further back given the relative mildness of the last downturn.

“Secondly, record order backlog figures reflect orders which have already been placed, not orders pending. They are lagging indicators. In certain cases, a lengthy order book may indicate problems in fulfilling client deliveries in the time schedule demanded, leading to over-run penalties. In other cases, the order might even be cancelled if economic conditions continue to deteriorate.”

Longden points out that it is relatively commonplace now to hear of lower levels of customer down-payment or even absence of down-payment on placing of an order.
This means that the client has less to lose by reining back or pulling out and that the supplier has to contend with a higher cash drain on working capital.

 

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