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6 GARP Stocks Poised to Yield Healthy Returns

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Those who are interested in building up a portfolio that can provide healthy returns by investing in undervalued stocks with a strong growth prospect may consider growth at a reasonable price, or GARP investing. However, one should not confuse it with a blend strategy. While the blend strategy chooses value and growth stocks, GARP investing looks for stocks that offer the best of both value and growth investing.

So when the market is rebounding strongly after bleeding or staying stable over a prolonged time period, investing in stocks by following the GARP strategy should boost one’s portfolio returns.

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 10% to 20% past as well as expected growth rates over the next few years.

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 a 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 six.

Here are the stocks that made it through the screen:

Williams-Sonoma Inc. (WSM - Free Report) is specialty retailer of products for the home. It operates through its three retail concepts: Williams-Sonoma, Pottery Barn and Hold Everything. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of nearly 3%.

Washington Federal, Inc. (WAFD - Free Report) is a non-diversified unitary savings and loan holding company that is primarily involved in attracting savings deposits from the general public and investing these funds in loans. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 9.2%.

Express Scripts Holding Company is one of the largest pharmacy benefit management companies in North America. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 0.7%.

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%.

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 has an average four-quarter positive earnings surprise of 4.4%.

Monarch Casino & Resort Inc. (MCRI - Free Report) owns and operates the tropically themed Atlantis Casino Resort in Reno, Nevada through its wholly owned subsidiary Golden Road Motor Inn, Inc. This Zacks Rank #2 has an average four-quarter positive earnings surprise of 17.6%.

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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.

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