Investors on the lookout for stocks with the potential for maximum growth and value investing may consider the growth at a reasonable price or GARP strategy.
This popular strategy helps investors gain exposure to stocks with impressive growth prospects that are trading at a discount. 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.
GARP Metrics – Mix of Growth & Value Metrics
The GARP approach helps identify 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.
Strong earnings growth history and impressive 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 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).
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 indicate that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only eight.
Here are six of the eight stocks that made it through the screen:
Grand Canyon Education, Inc. (LOPE - Free Report) is a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in its core disciplines of education, business, and healthcare. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 11.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.
PetMed Express, Inc. (PETS - Free Report) is a leading nationwide pet pharmacy. This Zacks Rank #2 stock came up with an average four-quarter earnings surprise of 25.7%.
Dollar General Corporation (DG - Free Report) is a discount retailer in the United States. This Zacks Rank #2 stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, delivering a positive average earnings surprise of 2.3%.
Best Buy Company Inc. (BBY - Free Report) is a multinational specialty retailer of consumer electronics, home office products, entertainment software, appliances and related services. This Zacks Rank #2 stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion. It delivered an average positive earnings surprise of 19.1%.
Anthem Inc. (ANTM - Free Report) is a health care company. The company provides medical products, through its subsidiaries. This Zacks Rank #2 stock came up with an average four-quarter earnings surprise of 7.2%.
Aptiv PLC (APTV - Free Report) is a technology company serving the automotive sector. The company designs and manufactures vehicle components and provides electrical and electronic and active safety technology solutions to the global automotive and commercial vehicle markets. This Zacks Rank #2 stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while missing the same on one occasion. It delivered an average positive earnings surprise of 3.5%.
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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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