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 well-liked 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 approach prefers 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.
Growth Metrics
Strong earnings growth history and impressive prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, picking stocks with a more stable and reasonable growth rate is a preferred tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the 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 another value metric that is 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).
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 indicates that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only nine.
Here are five stocks that made it through the screen:
CBRE Group Inc. CBG operates as a commercial real estate services and investment company. It has an average four-quarter positive earnings surprise of 18.71% and has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
MSCI Inc. MSCI is a leading provider of investment decision support tools to investment institutions worldwide. The company has an average four-quarter positive earnings surprise of 5.60% and carries a Zacks Rank #2.
Home Depot, Inc. HD is the one of world's largest home improvement retailers. The company has an average four-quarter positive earnings surprise of 3.8% and carries a Zacks Rank #2.
Primerica Inc. PRI distributes financial products to middle income households in the United States and Canada. It has an average four-quarter positive earnings surprise of 1.31% and a Zacks Rank #2.
Cintas Corporation CTAS is a supplier of corporate identity uniforms through rental and sales programs as well as a provider of related business services. The company has an average four-quarter positive earnings surprise of 6.96% and a Zacks Rank #2.
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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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