Investors following the growth or value strategy have always been on the lookout for stocks that are poised to see strong growth and available at a discount. Growth at a reasonable price or GARP investing is a strategy that takes care of these criteria.
However, one should not confuse GARP investing with the blend strategy. While the blend strategy promotes investment in both value and growth stocks, GARP investing requires both value and growth features in a single stock.
As the GARP strategy employs the principles of both value and growth, returns are more consistent and predictable irrespective of the market condition.
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 and earnings per share (EPS).
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, picking stocks with a more stable and reasonable growth rate is a preferred tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the 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 are poised to 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).
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 M-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 11.
Here are five stocks that made it through the screen:
Los Angeles CA-based CBRE Group Inc. (CBG - Free Report) operates as a commercial real estate services and investment company. It has an average four-quarter positive earnings surprise of 18.71% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Calgary, Canada, Canadian Pacific Railway Limited (CP - Free Report) operates a transcontinental railway network in Canada and the U.S. The company focuses on providing logistics and supply chain expertise services. The company sports a Zacks Rank #1.
Pasadena, CA-based East West Bancorp Inc. (EWBC - Free Report) is the holding company for East West Bank, East West Capital Trust I, East West Capital Trust II and Risk Services Inc. The company has an average four-quarter positive earnings surprise of 8.63% and carries a Zacks Rank #2.
Pawtucket, RI-based Hasbro Inc. (HAS - Free Report) is engaged in the design, manufacture and marketing of games and toys. The company has a Zacks Rank #2 and an average four-quarter positive earnings surprise of 19.06%.
Irvine, CA-based Masimo Corporation (MASI - Free Report) develops, manufactures and markets a family of non-invasive monitoring systems. The company has an average four-quarter positive earnings surprise of 8.11% 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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