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An investment strategy that seeks to provide impressive returns from stocks that are undervalued on the one hand and have a solid growth potential on the other, has always attracted attention. Growth at a reasonable price or GARP is one of the popular strategies in this domain. Instead of picking both value and growth stocks like the blend strategy does, GARP looks for stocks that offer the best of both value and growth investing.
GARP Strategy in Detail
Though investors following GARP consider popular metrics of both value and growth investing, the ideal range of these metrics is different from what is considered by value and growth investing. GARP investing employs popular value metrics – price-to-earnings (P/E) and price-to-book value (P/B) ratio – to evaluate whether a stock is undervalued or not.
In case of P/E ratio, investors following the GARP strategy look for a higher value of the ratio compared to value investors. However, they avoid picking companies with extremely high price-to-earnings ratios. On the other hand, like value investors, GARP investors give precedence to low P/B ratios. A ratio less than the industry average is preferred by GARP investors for choosing undervalued stocks.
The other metrics that are borrowed by GARP investors from the growth investing strategy are strong earnings growth history and impressive earnings growth prospects for the coming years. Unlike growth investors, GARP investors look for stocks with a more stable and reasonable growth rate instead of choosing those with extremely high growth rates. Growth rates between 10% and 20% are considered ideal in GARP strategy.
Return on equity (ROE) is another growth metric used in GARP strategy. Here, those stocks that have higher ROE compared to the industry average are considered as strong ROE is an indicator of superior stocks.
In order to make GARP strategy more profitable, we have only considered those with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
Screening Parameters
• Zacks Rank less than or equal to #2 (Only Strong Buy and Buy rated stocks can get through.)
• Last 5-year EPS & projected 3–5 year EPS growth rates between 10% and 20% (Strong EPS growth history and prospects ensure improving business.)
• ROE (over the past 12 months) greater than the industry average (Higher ROE compared to the industry average indicates superior stocks.)
• P/E and P/B ratios less than X-industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
The use of these few criteria has narrowed down the universe of over 7,700 stocks to only 8.
Here are five stocks from the eight that made it through the screen:
Citrix Systems, Inc. is one of the leading suppliers of application delivery and management software and services. This Zacks Rank #1 has an average four-quarter positive earnings surprise of 36.6%.
Dorman Products, Inc. (DORM - Free Report) is a leading supplier of OE Dealer Exclusive automotive replacement parts, automotive hardware, brake products, and household hardware. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of nearly 1%.
Teleflex Incorporated (TFX - Free Report) is primarily engaged in manufacturing, developing and supplying medical devices for different procedures in the medical industry throughout the globe. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 4.4%.
Alliance Data Systems Corporation is a leading provider of transaction services, credit services and marketing services to retail companies in North America. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 2.2%.
Monarch Casino & Resort Inc. (MCRI - Free Report) , through its wholly owned subsidiary Golden Road Motor Inn, Inc., owns and operates the tropically themed Atlantis Casino Resort in Reno, Nevada. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 17.6%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Stocks that GARP Investors Would Love to Buy
An investment strategy that seeks to provide impressive returns from stocks that are undervalued on the one hand and have a solid growth potential on the other, has always attracted attention. Growth at a reasonable price or GARP is one of the popular strategies in this domain. Instead of picking both value and growth stocks like the blend strategy does, GARP looks for stocks that offer the best of both value and growth investing.
GARP Strategy in Detail
Though investors following GARP consider popular metrics of both value and growth investing, the ideal range of these metrics is different from what is considered by value and growth investing. GARP investing employs popular value metrics – price-to-earnings (P/E) and price-to-book value (P/B) ratio – to evaluate whether a stock is undervalued or not.
In case of P/E ratio, investors following the GARP strategy look for a higher value of the ratio compared to value investors. However, they avoid picking companies with extremely high price-to-earnings ratios. On the other hand, like value investors, GARP investors give precedence to low P/B ratios. A ratio less than the industry average is preferred by GARP investors for choosing undervalued stocks.
The other metrics that are borrowed by GARP investors from the growth investing strategy are strong earnings growth history and impressive earnings growth prospects for the coming years. Unlike growth investors, GARP investors look for stocks with a more stable and reasonable growth rate instead of choosing those with extremely high growth rates. Growth rates between 10% and 20% are considered ideal in GARP strategy.
Return on equity (ROE) is another growth metric used in GARP strategy. Here, those stocks that have higher ROE compared to the industry average are considered as strong ROE is an indicator of superior stocks.
In order to make GARP strategy more profitable, we have only considered those with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
Screening Parameters
• Zacks Rank less than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)
• Last 5-year EPS & projected 3–5 year EPS growth rates between 10% and 20%
(Strong EPS growth history and prospects ensure improving business.)
• ROE (over the past 12 months) greater than the industry average
(Higher ROE compared to the industry average indicates superior stocks.)
• P/E and P/B ratios less than X-industry average
(P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
The use of these few criteria has narrowed down the universe of over 7,700 stocks to only 8.
Here are five stocks from the eight that made it through the screen:
Citrix Systems, Inc. is one of the leading suppliers of application delivery and management software and services. This Zacks Rank #1 has an average four-quarter positive earnings surprise of 36.6%.
Dorman Products, Inc. (DORM - Free Report) is a leading supplier of OE Dealer Exclusive automotive replacement parts, automotive hardware, brake products, and household hardware. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of nearly 1%.
Teleflex Incorporated (TFX - Free Report) is primarily engaged in manufacturing, developing and supplying medical devices for different procedures in the medical industry throughout the globe. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 4.4%.
Alliance Data Systems Corporation is a leading provider of transaction services, credit services and marketing services to retail companies in North America. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 2.2%.
Monarch Casino & Resort Inc. (MCRI - Free Report) , through its wholly owned subsidiary Golden Road Motor Inn, Inc., owns and operates the tropically themed Atlantis Casino Resort in Reno, Nevada. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 17.6%.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back-testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today .
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance .
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »