Growth at a reasonable price or GARP is an excellent way for investors to make some quick gains. This strategy helps investors gain exposure to stocks that have impressive prospects and are trading at a discount.
The GARP approach leads to the identification of 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.
That means a portfolio created on the basis of GARP strategy is expected to have stocks that offer the best of both value and growth investing.
Strong earnings growth and solid 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 likely 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 indicate that the stocks are undervalued.)
Here are seven of the 10 stocks that made it through the screen:
VMware, Inc. (VMW - Free Report) provides virtualization solutions from the desktop to the data center. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 5.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boston Scientific Corporation (BSX - Free Report) transforms lives through innovative medical solutions that improve the health of patients around the world. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 2.4%.
FactSet Research Systems Inc. (FDS - Free Report) creates flexible, open data and software solutions for tens of thousands of investment professionals around the world, providing instant access to financial data and analytics that investors use to make crucial investment decisions. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 1.9%.
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%.
Anthem Inc. (ANTM - Free Report) is a health care company. It provides medical products through its subsidiaries. The company delivered an average four-quarter positive earnings surprise of 7.2%. It carries a Zacks Rank #2.
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%.
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. The Zacks Rank #2 stock delivered a positive earnings surprise of 7.5% last quarter.
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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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