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Growth at a reasonable price or GARP is speculated to offer investors a chance to get hold of stocks that are undervalued but have impressive growth potential. One who seeks to follow this strategy is expected to invest in stocks that are available at a discounted price and boast strong earnings growth. While this appears similar to the blend strategy, there is a thin line of difference. While the blend strategy helps to identify value and growth stocks, GARP investing strategy helps to choose stocks that provide the best of both value and growth investing.
Key Features of GARP
The GARP strategy seeks to offer an ideal investment by borrowing the best features of both value and growth investing. While investors following the GARP strategy give precedence to value ratios such as price-to-earnings (P/E) and price-to-book value (P/B) ratio, they also use earnings per share (EPS) growth rates and return on equity (ROE) like growth investors to identify potential stocks. However, the range of the values of metrics that are considered by GARP investing may differ from those that are considered by value or growth investors.
While value investors look for an extremely low P/E ratio to choose a company, the GARP strategy focuses on acquiring stocks that have relatively higher ratios but less than their respective industry average. Meanwhile, GARP investing chooses stocks with P/B ratios lower than their industries similar to value investors.
Separately, investors following the GARP strategy give priority to stocks with an impressive EPS growth track record over those with extremely high growth rates. Companies that qualify GARP investing are believed to have past as well as expected growth rates over the next few years between 10% and 20%.
Another metric, which is borrowed by GARP investors from growth investing, is return on equity (ROE). Like growth investors, the GARP strategy looks for stocks with higher ROE than their industry average.
Screening Parameters
Along with the criteria we discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.
• 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.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only seven.
Here are the five stocks from the seven that made it through the screen:
Arch Capital Group Ltd. (ACGL - Free Report) is a diversified financial services holding company, with an emphasis on the insurance sector. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 9.3%.
NICE Ltd. (NICE - Free Report) provides enterprise software solutions. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 7.2%.
First American Financial Corporation (FAF - Free Report) provides financial services through its Title Insurance and Services segment and its Specialty Insurance segment. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 14.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Silicon Motion Technology Corp. (SIMO - Free Report) designs, develops and markets universally compatible and low-power semiconductor solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 12.9%.
Thermo Fisher Scientific Inc. (TMO - Free Report) provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 2.1%.
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 GARP Stocks that Should Grace Your Portfolio
Growth at a reasonable price or GARP is speculated to offer investors a chance to get hold of stocks that are undervalued but have impressive growth potential. One who seeks to follow this strategy is expected to invest in stocks that are available at a discounted price and boast strong earnings growth. While this appears similar to the blend strategy, there is a thin line of difference. While the blend strategy helps to identify value and growth stocks, GARP investing strategy helps to choose stocks that provide the best of both value and growth investing.
Key Features of GARP
The GARP strategy seeks to offer an ideal investment by borrowing the best features of both value and growth investing. While investors following the GARP strategy give precedence to value ratios such as price-to-earnings (P/E) and price-to-book value (P/B) ratio, they also use earnings per share (EPS) growth rates and return on equity (ROE) like growth investors to identify potential stocks. However, the range of the values of metrics that are considered by GARP investing may differ from those that are considered by value or growth investors.
While value investors look for an extremely low P/E ratio to choose a company, the GARP strategy focuses on acquiring stocks that have relatively higher ratios but less than their respective industry average. Meanwhile, GARP investing chooses stocks with P/B ratios lower than their industries similar to value investors.
Separately, investors following the GARP strategy give priority to stocks with an impressive EPS growth track record over those with extremely high growth rates. Companies that qualify GARP investing are believed to have past as well as expected growth rates over the next few years between 10% and 20%.
Another metric, which is borrowed by GARP investors from growth investing, is return on equity (ROE). Like growth investors, the GARP strategy looks for stocks with higher ROE than their industry average.
Screening Parameters
Along with the criteria we discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.
• 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.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only seven.
Here are the five stocks from the seven that made it through the screen:
Arch Capital Group Ltd. (ACGL - Free Report) is a diversified financial services holding company, with an emphasis on the insurance sector. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 9.3%.
NICE Ltd. (NICE - Free Report) provides enterprise software solutions. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 7.2%.
First American Financial Corporation (FAF - Free Report) provides financial services through its Title Insurance and Services segment and its Specialty Insurance segment. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 14.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Silicon Motion Technology Corp. (SIMO - Free Report) designs, develops and markets universally compatible and low-power semiconductor solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 12.9%.
Thermo Fisher Scientific Inc. (TMO - Free Report) provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 2.1%.
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 »