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.
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 five 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. It has delivered average positive earnings surprise of 12.09% in the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank stocks here.
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 flaunts a Zacks Rank #1. Its average trailing four-quarter positive surprise is 10.62%.
CSX Corporation (CSX - Free Report) is a transportation supplier company that offers rail, intermodal and rail-to-truck transload services to the energy, industrial, construction, agricultural and consumer products companies. The company carries a Zacks Rank #2. It has delivered four-quarter average positive surprise of 10.31%.
U.S. Physical Therapy, Inc. (USPH - Free Report) is an operator of outpatient physical and occupational therapy clinics that offer pre and post-operative care for a variety of disorders and injuries. It also provides rehabilitation facilities and preventive care. The company carries a Zacks Rank #2. It has delivered four-quarter average positive surprise of 8.93%.
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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.