Growth at a reasonable price, or GARP, is an effective investment strategy for investors interested in building up a portfolio that offers characteristics of both value and growth investing. Investors following GARP seek to acquire stocks that have solid growth prospects, but are available at discounted prices. Unlike a blend strategy, a portfolio, which is using GARP investing, is expected to have stocks that offer the best of both value and growth investing rather than investing in both value and growth stocks.
GARP Metrics - Mix of Growth & Value Metrics
Both strong earnings growth history and impressive earnings growth prospects in the coming years are the main concepts that GARP investors borrow from the growth investing strategy. However, they choose stocks with a more stable and reasonable growth rate instead of choosing those with extremely high growth rates. Growth rates between 10% and 20% are considered ideal in 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 flows get precedence in GARP investing.
GARP investing gives precedence to one of the popular value metrics - price-to-earnings (P/E) ratio. Though this investing style chooses stocks with higher P/E ratios compared to value investors, they avoid picking companies with extremely high P/E ratios.
Moreover, price-to-book value (P/B) ratio is another value metric that is considered in GARP investing.
Using GARP principles, we have run a screen to identify stocks that should offer good returns in the near term.
- Zacks Rank less than or equal to #2 (Only Strong Buy and Buy rated stocks can get through.)
- 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 X-industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
- Using these criteria we've narrowed down the universe of over 7,700 stocks to only seven.
Here are five of the seven stocks that met these criteria:
Lear Corp. ( LEA ) is a leading global supplier of automotive seating systems, electrical distribution systems and electronics. This Zacks Rank #1 company reported earnings per share (EPS) of $3.40 last quarter, surpassing the Zacks Consensus Estimate of $2.83. LEA also has an average four-quarter earnings surprise of more than 13.1%.
Air Methods Corp. ( AIRM ) provides air medical emergency transport services and systems throughout North America. This Zacks Rank #1 company reported EPS of 50 cents last quarter, beating the Zacks Consensus Estimate of 42 cents. AIRM also has an average four-quarter earnings surprise of more than 11.3%.
DST Systems Inc. ( DST ) provides sophisticated information processing and computer software services and products. This Zacks Rank #2 company reported EPS of $1.61 last quarter, beating the Zacks Consensus Estimate of $1.46. DST also has an average four-quarter earnings surprise of more than 3.2%.
Express Scripts Holding Company ( ESRX ) is one of the largest pharmacy benefit management companies in North America. This Zacks Rank #2 company has a last five-year average EPS growth rate of 17.8% and expected next five-year growth rate of 11.6%.
Whirlpool Corp. ( WHR ) manufactures and markets a full line of major appliances and related products, primarily home laundry appliances, home refrigerators and freezers, home cooking appliances, home dishwashers, etc. This Zacks Rank #2 company has a last five-year average EPS growth rate of 10.4% and expected next five-year growth rate of 17%.
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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 .
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(We are reissuing this article to correct a mistake. The original article, issued June 15, 2016, should no longer be relied upon.)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.