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If you are looking for a profitable portfolio of stocks offering the best of value and growth investing, try the growth at a reasonable price or GARP strategy. GARP investing is a strategy that combines aspects of both growth investing and value investing.
The technique seeks to identify companies that are showing consistent earnings growth above broad market levels while avoiding stocks with very high valuations. The strategy focuses on moderate risk by finding growth companies that are priced reasonably by the market.
These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.
Growth Metrics
Earnings Growth: GARP investors focus on a history of strong earnings growth and promising future earnings. They prefer stable and reasonable growth rates, typically between 10% and 40%.
Return on Equity (ROE): High ROE, exceeding industry averages, is crucial for GARP investors to identify superior stocks. Positive cash flows also take priority in the GARP strategy.
Value Metrics
Price-to-Earnings (P/E) Ratio: GARP investing emphasizes the importance of the P/E ratio, selecting stocks with higher P/E ratios than typical value investors but avoiding extremely high P/E ratios.
Price-to-Book (P/B) Ratio: This is another key metric for GARP investors, used to determine the relative value of stocks.
Here are some key aspects and benefits of GARP investing:
Balanced Approach: GARP investors look for companies with solid growth prospects but at the same time ensure that they don't overpay for these prospects. This balance between growth and value aims to reduce the risk of investing in overvalued stocks.
Focus on Earnings Growth: Earnings growth is a key metric in GARP investing. Companies targeted by GARP investors typically exhibit steady and sustainable earnings growth, which suggests they are well-managed and have good business models.
Avoiding Extremes: GARP avoids the extremes of investing in companies with very high growth but high valuations (common in pure growth investing), and those with very low valuations but questionable growth prospects (common in pure value investing).
Flexibility: GARP investing is not restricted to a particular sector or type of stock. It can be applied across various sectors, allowing for a diversified portfolio.
Risk Management: By not paying excessively for growth, GARP investing inherently embeds a risk management strategy. It aims to avoid the pitfalls of overvalued ‘growth traps’ and undervalued ‘value traps’.
Potential for Consistent Returns: Companies chosen through GARP typically have proven track records and are less speculative than high-growth companies, potentially leading to more consistent returns over time.
Adaptability: GARP investing can adapt to different market conditions. In market downturns, the ‘reasonable price’ aspect can provide some downside protection, while in bullish markets, the growth aspect can drive returns.
ETF to Play
We have a pureplay GARP ETF, namely Invesco S&P 500 GARP ETF (SPGP - Free Report) , which has a Zacks Rank #2 (Buy). The underlying S&P 500 Growth at a Reasonable Price Index is composed of securities with strong growth characteristics selected from the Russell Top 200 Index.
No stock accounts for more than 2.50% of the fund. CF Industries, Diamondback Energy and Marathon Petroleum are the top three holdings. Energy (25.99%), Information Technology (20.70%) and Materials (13.32%) are the fund’s top three sectors. The 77-stock fund charges 34 bps in fees.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)
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Why You Should Play Top-Ranked GARP ETF (SPGP)
If you are looking for a profitable portfolio of stocks offering the best of value and growth investing, try the growth at a reasonable price or GARP strategy. GARP investing is a strategy that combines aspects of both growth investing and value investing.
The technique seeks to identify companies that are showing consistent earnings growth above broad market levels while avoiding stocks with very high valuations. The strategy focuses on moderate risk by finding growth companies that are priced reasonably by the market.
These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.
Growth Metrics
Earnings Growth: GARP investors focus on a history of strong earnings growth and promising future earnings. They prefer stable and reasonable growth rates, typically between 10% and 40%.
Return on Equity (ROE): High ROE, exceeding industry averages, is crucial for GARP investors to identify superior stocks. Positive cash flows also take priority in the GARP strategy.
Value Metrics
Price-to-Earnings (P/E) Ratio: GARP investing emphasizes the importance of the P/E ratio, selecting stocks with higher P/E ratios than typical value investors but avoiding extremely high P/E ratios.
Price-to-Book (P/B) Ratio: This is another key metric for GARP investors, used to determine the relative value of stocks.
Here are some key aspects and benefits of GARP investing:
Balanced Approach: GARP investors look for companies with solid growth prospects but at the same time ensure that they don't overpay for these prospects. This balance between growth and value aims to reduce the risk of investing in overvalued stocks.
Focus on Earnings Growth: Earnings growth is a key metric in GARP investing. Companies targeted by GARP investors typically exhibit steady and sustainable earnings growth, which suggests they are well-managed and have good business models.
Avoiding Extremes: GARP avoids the extremes of investing in companies with very high growth but high valuations (common in pure growth investing), and those with very low valuations but questionable growth prospects (common in pure value investing).
Flexibility: GARP investing is not restricted to a particular sector or type of stock. It can be applied across various sectors, allowing for a diversified portfolio.
Risk Management: By not paying excessively for growth, GARP investing inherently embeds a risk management strategy. It aims to avoid the pitfalls of overvalued ‘growth traps’ and undervalued ‘value traps’.
Potential for Consistent Returns: Companies chosen through GARP typically have proven track records and are less speculative than high-growth companies, potentially leading to more consistent returns over time.
Adaptability: GARP investing can adapt to different market conditions. In market downturns, the ‘reasonable price’ aspect can provide some downside protection, while in bullish markets, the growth aspect can drive returns.
ETF to Play
We have a pureplay GARP ETF, namely Invesco S&P 500 GARP ETF (SPGP - Free Report) , which has a Zacks Rank #2 (Buy). The underlying S&P 500 Growth at a Reasonable Price Index is composed of securities with strong growth characteristics selected from the Russell Top 200 Index.
No stock accounts for more than 2.50% of the fund. CF Industries, Diamondback Energy and Marathon Petroleum are the top three holdings. Energy (25.99%), Information Technology (20.70%) and Materials (13.32%) are the fund’s top three sectors. The 77-stock fund charges 34 bps in fees.
(Disclaimer: This article has been written with the assistance of Generative AI. However, the author has reviewed, revised, supplemented, and rewritten parts of this content to ensure its originality and the precision of the incorporated information.)