"GARP" -- short for "growth at a reasonable price" -- is an investing style you'll hear about from many fund managers. These folks like to find solidly growing business models, yet with valuations that are respectable.
In recent years, it was hard to be a GARP investor, as the best growth stocks began to trade up to valuations that were hard to justify.
Not anymore. The steady drawdown in tech stocks has left many of them squarely back in the "reasonably priced" camp. My favorite metric to find them: the PEG ratio , which is the price-to-earnings ratio (P/E) divided by the earnings growth rate.
Ideally, you'll find stocks with a PEG ratio below 1.0, which means that the P/E ratio is lower than the earnings growth rate.
Of course, growth investors come in two camps: those seeking out companies delivering torrid profit growth and moderate P/E ratios, or those seeking out tamer growth but even lower P/E ratios.
I went scouring the basket of tech stocks, slicing and dicing them according to various GARP approaches. Every one of these firms is expected to boost earnings per share ( EPS ) by at least 20% in 2015 and again in 2016:
To be sure, some of these EPS growth estimates are so impressive simply because the company is coming off of a bad year. Take Jabil Circuit (NYSE: JBL ) as an example.
The contract manufacturer lost a key supply contract in fiscal (August) 2013, but that loss is only now being felt in the current fiscal year: Sales are on pace to drop 15%, to $15.6 billion, and EPS by more than 75%, to just $0.55.
But some of the lost revenue entailed subpar margins, and though Jabil's sales are expected to rebound only 5% in fiscal 2015, per share profits should surge past $1.50, according to Goldman Sachs. They see EPS rising above $2 in fiscal 2016.
By then, free cash flow per share should exceed $3 a share, which is quite impressive for a $19 stock.
But what about the GARP investors who really prefer low P/E stocks? Looking again at that basket of tech stocks that are expected to boost EPS at least 20% in 2015 and 2016, this time focusing on those with the lowest forward P/E ratio, some of the same companies reappear.
JinkoSolar (NYSE: JKS ) and Trina Solar (NYSE: TSL ) head up the list, likely due to the fact that they operate in a boom-and-bust industry. Times are good right now, but investors know that such good times don't often last.
Endurance International Holdings (Nasdaq: EIGI ) is shaping up to be a classic GARP stock, despite its limited history. The provider of cloud hosting and Web tools had less than $100 million in sales in 2010, but by the time it went public in October 2013, sales were on track to exceed $500 million. Sales are expected to exceed $700 million by next year.
To be sure, Endurance operates in a crowded field, but a series of small acquisitions has helped the company broaden its product offerings, and Endurance is now seeing a high level of cross-selling into its customer bases.
The fact that Endurance has exceeded quarterly profit estimates in each of the past two quarters suggests that management takes a conservative approach to forward guidance. Analysts currently anticipate 20% sales growth this year, slowing to 15% next year, but expanding margins should help profits grow at a faster pace. The fact that shares trade for around 10 times projected 2015 profits makes this a classic GARP play.
Risks to Consider: Almost all of these companies are expected to boost profits even faster than sales, implying solid margin gains. But some market strategists suggest corporate profit margins have peaked, and if so, these companies will have to buck that trend.
Action to Take --> Using screening tools is a great way to find GARP stocks, but it's important to do further research to find out what is driving projected profit growth. You want to be sure that the pillars in place for profit growth will be there in the future as well.
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