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By Kit Rees and Laura Wright

Internet stocks, food delivery companies and online retailers are paying a heavy price for any earnings disappointment.

Companies from Asos Plc to Zalando SE and Logitech International SA have all suffered steep stock-market losses in Europe after their results in the past month. It’s a fact that makes companies with sky-high valuations look increasingly volatile, and shows that investors are less willing to buy growth at any cost.

The rocky performance also sharpens the distinction between stocks that can be called pandemic winners and everything else in the market. For most European companies, it’s been a tremendous earnings season and “beat and raise” looks like the norm, helping drive the Stoxx Europe 600 Index to its best week since March. But for the few stocks that were wildly popular during lockdown, extreme valuations are taking a toll.

Bloomberg

“We are past the stage where investors will invest in anything,” Janet Mui, investment director at Brewin Dolphin, said by phone. “Investors are starting to discriminate. Investors are looking for quality and predictability.”
To be sure, the trend isn’t uniform. Many of the stocks have bounced back after their weak earnings and still trade near all-time highs. Meal-kit maker HelloFresh SE tumbled 8.7 per cent in intraday trading Friday after saying it will be less profitable than forecast, but closed down only 2.5 per cent for the day. It’s still up more than 20 per cent this year.

But investors haven’t been so forgiving of everyone. Asos sank 18 per cent after the online retailer said it expected sales would soften, while remote software maker TeamViewer AG dropped 14 per cent when it reported weaker-than-expected results.

Graph 2Bloomberg

“Some of them have gone ahead of reality,” said Freddie Lait, chief investment officer of Latitude Investment Management. “The next year will not be easy.”

Part of the reason why investors are less tolerant is that the competition is getting better. There are plenty of cheaper stocks with strong sales growth and money is flowing to cyclicals. Lait said he sees an opportunity to buy stocks that underperformed during the pandemic, such as drinks makers Diageo Plc and Heineken NV, which have been able to push through price increases.

Graph 3Bloomberg

It’s a trend that’s been playing out all year. Just Eat Takeaway.com NV, Ubisoft Entertainment SA and Ocado Group Plc are among the biggest decliners in the Stoxx 600 in 2021, each down more than 16 per cent.

Graph 4Bloomberg

Expensive stocks took an initial leg down starting in February as bond yields surged amid a pickup in inflation. Yields may resume their upward trajectory this fall as the Federal Reserve lays out a timeline for pulling back on its support for the economy, which would place renewed pressure on more highly valued stocks.

The underperformance in online stocks comes at a particularly testing time for investors, with a widening regulatory crackdown in China on the nation’s internet giants also fraying nerves.

“The market is trying to assess long-term sustainable growth going forward,” said John Flynn, a portfolio manager at State Street Global Advisors. “This is made difficult by somewhat unsustainable levels of growth seen in the prior four quarters.”

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