Growth at a reasonable price, or GARP is an excellent way for investors to make some quick gains. This well-liked strategy helps investors gain exposure to stocks that have impressive growth prospects but are trading at a discount. Unlike the blend strategy, a portfolio created on the GARP way of investing is expected to have stocks that offer the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
The GARP approach prefers stocks that are priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.
Both strong earnings growth history and impressive earnings prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, pursuing stocks with a more stable and reasonable growth rate is also a tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the 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 flow find precedence under the GARP plan.
GARP investing gives priority to one of the popular value metrics – price-to-earnings (P/E) ratio. Though this investing style picks stocks with higher P/E ratios compared to value investors, it avoids companies with extremely high P/E ratios. Moreover, the price-to-book value (P/B) ratio is another value metric that is considered.
Using the GARP principle, we have run a screen to identify stocks that should offer solid returns in the near term.
Along with the criteria discussed in the above section, we have considered a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) to make the strategy foolproof.
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 indicates that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only four.
Here are the stocks that made it through the screen:
Headquartered in Norwood, MA, Analog Devices Inc. (ADI - Free Report) is an original equipment manufacturer of semiconductor devices, specifically, analog, mixed signal and digital signal processing (DSP) integrated circuits. The company has an average four-quarter positive earnings surprise of 14.1% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Analog Devices’ year-to-date return of 6% is higher than the S&P 500’s addition of 4.6%.
MA-based Affiliated Managers Group Inc. (AMG - Free Report) is a global asset manager with equity investments in a large group of investment management firms or affiliates. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 1.26%.
Affiliated Managers’ year-to-date return of 12% beats the S&P 500’s return as well.
Littelfuse Inc. (LFUS - Free Report) is a leading manufacturer and seller of fuses and other circuit protection devices. It has an average four-quarter positive earnings surprise of 3.70% and carries a Zacks Rank #2.
Notably, Littelfuse rallied 29.8% in the last one year, higher than the S&P 500 mark.
Teleflex Inc (TFX - Free Report) is a provider of single-use medical devices for common diagnostic and therapeutic procedures in critical care and surgical applications worldwide. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 6.13%.
Further, the stock gained 23.3% on a year-to-date basis, much better than the S&P 500.
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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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