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 four of the six stocks that made it through the screen:
Cadence Design System, Inc. (CDNS - Free Report) offers software, hardware, services and reusable IC design blocks (IPs) to electronic systems and semiconductor customers. The company sports a Zacks Rank #1. Its average trailing four-quarter earnings surprise is 12.09%.You can see the complete list of today’s Zacks #1 Rank stocks here.
Intuit Inc. (INTU - Free Report) is a business and financial software company that develops and sells financial, accounting and tax preparation software and related services. The company carries a Zacks Rank #2. Its average trailing four-quarter positive surprise is 55.57%.
LPL Financial Holdings Inc. (LPLA - Free Report) is engaged in providing an integrated platform of brokerage and investment advisory services to independent financial advisors and financial advisors at financial institutions. The company has a Zacks Rank #2. Its average trailing four-quarter positive surprise is 10.62%.
VMware, Inc. (VMW - Free Report) is a leading provider of virtualization platforms, virtual infrastructure automation and virtual infrastructure management. The company carries a Zacks Rank #2. It has a positive average earnings surprise of 5.94% in the trailing four quarters.
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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.