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.
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.
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.
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 also 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.)
Here are seven of the 14 stocks that made it through the screen:
Anthem Inc. (ANTM - Free Report) is a health care company. The company provides medical products through its subsidiaries. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 7.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
VMware, Inc. (VMW - Free Report) provides virtualization solutions from the desktop to the data center. The company delivered an average four-quarter positive earnings surprise of 5.6%. It has a Zacks Rank #2.
Merit Medical Systems, Inc. (MMSI - Free Report) set out to build the world's most customer-focused healthcare company by understanding customers' needs, and innovating and delivering a diverse range of products that improve the lives of people, families, and communities throughout the world. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 10.2%.
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%.
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%.
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.
Get the rest of the stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »