If you’re looking for a profitable portfolio of stocks that will offer the best of value and growth investing, try the growth at a reasonable price or GARP strategy. It helps an investor gain exposure to stocks that are undervalued and have impressive growth prospects. 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
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 nine.
Here are six of the nine stocks that made it through the screen:
Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) is a casual dining restaurant chain focused on serving an imaginative selection of high quality gourmet burgers in a family-friendly atmosphere. The company has an average four-quarter positive earnings surprise of 17.27% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hill-Rom Holdings, Inc. (HRC - Free Report) offers medical technology solutions that enhance outcomes for patients and their caregivers. The company has an average four-quarter positive earnings surprise of 5.60% and carries a Zacks Rank #2.
On Semiconductor Corporation (ON - Free Report) is a supplier of broadband and power management integrated circuits and standard semiconductors used in numerous advanced devices ranging from high-speed fiber optic networking equipment to precise power management functions found in portable electronics. The company has an average four-quarter positive earnings surprise of 5.18% and carries a Zacks Rank #2.
Ruth’s Hospitality Group, Inc. (RUTH - Free Report) along with its subsidiaries develops, operates, and franchises dining restaurants. The company has an average four-quarter positive earnings surprise of 4.07% and carries a Zacks Rank #2.
Littelfuse, Inc. (LFUS - Free Report) is a leading manufacturer and seller of fuses and other circuit protection devices for use in the electronic, automotive and general industrial markets. The company has an average four-quarter positive earnings surprise of 2.14% and carries a Zacks Rank #2.
B&G Foods Inc. (BGS - Free Report) along with its subsidiaries sells and distributes a diversified portfolio of high-quality, shelf-stable foods across the United States, Canada and Puerto Rico. The company has an average four-quarter positive earnings surprise of 1.95% and carries 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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