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 strategy seeks to offer an ideal investment by utilizing the best features of both value and growth investing. Investors adopting the GARP approach will prefer to buy stocks that are priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in 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 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 five of the 10 stocks that made it through the screen:
Cigna Corporation (CI - Free Report) is a health service organization that offers health insurance, related benefits and other health services. The company carries a Zacks Rank #1 (Strong Buy). It has delivered an average positive earnings surprise of 15.61% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
Celanese Corporation (CE - Free Report) is a global hybrid chemical company that produces chemical substances and materials. The company has a Zacks Rank #2 (Buy). It has delivered an average positive earnings surprise of 11.51% in the trailing four quarters.
Teradyne, Inc. (TER - Free Report) is a leading provider of automated test equipment and caters primarily to the semiconductor test market. The company carries a Zacks Rank #2. It has delivered an average positive earnings surprise of 22.1% in the preceding four quarters.
CBRE Group, Inc. (CBRE - Free Report) offers commercial real estate services to tenants, owners, lenders and investors in office, retail, industrial, multi-family, and other types of commercial real estates globally. The company has a Zacks Rank #2. It has delivered a positive four-quarter earnings surprise of 9.49%.
EMCOR Group, Inc. (EME - Free Report) is a provider of mechanical and electrical construction as well as industrial and energy infrastructure services for a diverse range of businesses. The company carries a Zacks Rank #2. It has delivered an average four-quarter earnings surprise of 24.5%.
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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.