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. Growth Metrics 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. Value Metrics 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. Screening Parameters Along with the criteria discussed in the above section, we have considered a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy). (Strong EPS growth history and prospects ensure improving business.) Last 5-year EPS & projected 3–5 year EPS growth rates between 10% and 20% (Higher ROE compared to the industry average indicates superior stocks.) ROE (over the past 12 months) greater than the industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.) P/E and P/B ratios less than M-industry average Here are four of the five stocks that made it through the screen: Heico Corporation ( HEI Quick Quote HEI - Free Report) is a manufacturer of Federal Aviation Administration - approved jet engine and aircraft component replacement parts. The company carries a Zacks Rank #2. The company has an average trailing four-quarter earnings surprise is 10.07%. You can see the complete list of today’s Zacks #1 Rank stocks here. Microsoft Corporation ( MSFT Quick Quote MSFT - Free Report) is a broad-based technology provider whose offerings include software, hardware, online and support services. The company carries a Zacks Rank #2. It has an average positive surprise of 9.64% in the trailing four quarters. Zoetis Inc. ( ZTS Quick Quote ZTS - Free Report) is involved in the discovery, development, manufacturing and commercialization of animal health medicines and diagnostic products. The company carries a Zacks Rank #2. It has an average positive surprise of 7.34% in the trailing four quarters. Cadence Design System, Inc. ( CDNS Quick Quote CDNS - Free Report) offers software, hardware, services and reusable IC design blocks (IPs) to electronic systems and semiconductor customers. It carries a Zacks Rank #2. Its average trailing four-quarter earnings surprise is 7.44%. 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.