Investors looking for stocks that are available at discounted prices and also have solid growth potential may easily count on growth at a reasonable price or GARP strategy. This strategy is best suited for an environment where major benchmarks are witnessing a strong rebound in the latter half of a particular time frame after plunging in the first half. Rather than investing in both value and growth stocks like blend investors do, investors following GARP love to invest in undervalued stocks that offer solid growth prospects too.
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 per the GARP strategy.
Return on equity (ROE) is another growth metric used in GARP strategy. Here, those stocks that have higher ROE compared with the industry average are considered as strong ROE is an indicator of superior stocks.
In order to make the GARP strategy more profitable, we have only considered those with a favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
• 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 narrowed down the universe of over 7,700 stocks to only 12.
Here are five stocks from the 12 that made it through the screen:
Activision Blizzard, Inc. (ATVI - Analyst Report) is a worldwide pure-play online and console game publisher. This Zacks Rank #1 stock has an average four-quarter positive earnings surprise of 33.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Aetna Inc. (AET - Analyst Report) is one of the nation's largest health benefits and insurance and financial services organizations. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 7.3%.
Boston Scientific Corporation (BSX - Analyst Report) is a worldwide developer, manufacturer and marketer of minimally invasive medical devices. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 6.3%.
Affiliated Managers Group Inc. (AMG - Analyst Report) is an asset management holding company, which acquires majority interests in mid-sized investment management firms. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 1%.
Vantiv, Inc. (VNTV - Snapshot Report) is an integrated payment processor engaged in providing advanced technology solutions for businesses and financial institutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 4.5%.
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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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