Since Donald Trump’s victory in the U.S. presidential election, major benchmarks have witnessed a remarkable rebound and made the environment ideal for stocks that offer the best of both value and growth investing. But choosing such stocks may not be an easy task and thus may prompt one to look for a strategy that can help in picking quality stocks. This is where growth at a reasonable price or GARP strategy comes in.
While a blend strategy calls for investments in value and growth stocks, GARP strategy tries to find stocks that are undervalued as well as have impressive growth prospects. This strategy is also 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. Hence, one seeking favorable returns in the current scenario may follow this strategy to add potential stocks to their portfolios.
GARP: Best of Value & Growth Investing
Though investors following GARP consider popular metrics of both value and growth investing, the ideal range of these metrics are different from what value and growth investing consider. 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 in 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 in GARP strategy.
Return on equity (ROE) is another growth metric used in GARP strategy. This strategy considers those stocks that have higher ROE compared to the industry average as a strong ROE is an indicator of superior stocks.
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 eight.
Here are the five stocks from the eight that made it through the screen:
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%.
AngioDynamics Inc. (ANGO - Free Report) is a leading provider of innovative medical devices used by interventional radiologists, vascular surgeons and other physicians. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 16.2%.
Microsemi Corporation (MSCC - Free Report) is a leading designer, manufacturer and marketer of analog, mixed-signal and discrete semiconductors. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 10.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
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%.
F5 Networks, Inc. (FFIV - Free Report) is a leading provider of integrated Internet traffic and content management solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 3.4%.
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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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