Growth at a reasonable price, or GARP, provides an excellent opportunity for investors who are interested in deriving healthy returns. Investors following GARP seek to acquire stocks that have solid growth prospects but are available at discounted prices. Unlike a blend strategy, a portfolio that uses GARP investing is expected to have stocks that offer the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
Both strong earnings growth history and impressive earnings growth prospects in the coming years are the main concepts that GARP investors borrow from the growth investing strategy. However, they choose 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.
Another growth metric that is considered by both growth and GARP investors is return on equity (ROE). GARP investors look for strong and higher ROE compared to the industry average to identify superior stocks. Moreover, stocks with positive cash flows get precedence in GARP investing.
GARP investing gives precedence to one of the popular value metrics – price-to-earnings (P/E) ratio. Though this investing style chooses stocks with higher P/E ratios compared to value investors, they avoid picking companies with extremely high P/E ratios.
Moreover, price-to-book value (P/B) ratio is another value metric that is considered in GARP investing.
Using GARP principles, we have run a screen to identify stocks that should offer good returns in the near term.
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 five.
Here are the five stocks that made it through the screen:
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%.
Arch Capital Group Ltd. (ACGL - Free Report) is a diversified financial services holding company, with an emphasis on the insurance sector. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 9.3%.
IPG Photonics Corporation (IPGP - Free Report) is the world leader in high-power fiber lasers and amplifiers. It has an average four-quarter positive earnings surprise of 2.1% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
AngioDynamics Inc. (ANGO - Free Report) is a leading provider of innovative medical devices used by interventional radiologists, vascular surgeons and other physicians. It has an average four-quarter positive earnings surprise of 16.2% and carries a Zacks Rank #2.
Express Scripts Holding Company (ESRX - Free Report) is one of the largest pharmacy benefit management companies in North America. It has an expected earnings growth rate of 15.5% for the current fiscal year and has a Zacks Rank #2.
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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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