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 approach helps to identify 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 six of the nine stocks that made it through the screen:
Apple Inc. AAPL is engaged in designing, manufacturing and marketing mobile communication and media devices, personal computers, and portable digital music players. The company has an average four-quarter positive earnings surprise of 6.4% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks.
MSCI Inc. MSCI is an independent provider of research-driven insights and tools for institutional investors. It has an average four-quarter positive earnings surprise of 5% and a Zacks Rank #2.
Broadridge Financial Solutions, Inc. BR is a leading global provider of technology-based outsourcing solutions to the financial services industry. It has an average four-quarter positive earnings surprise of 12.8% and a Zacks Rank #2.
S&P Global, Inc. SPGI is a provider of ratings, benchmarks, analytics and data to the capital and commodity markets. It has an average four-quarter positive earnings surprise of 11.1% and a Zacks Rank #2.
The Toro Company TTC is a leading worldwide provider of innovative solutions for the outdoor environment, including turf, snow and ground engaging equipment and irrigation and outdoor lighting solutions. The company has an average four-quarter positive earnings surprise of 7.4% and carries a Zacks Rank #2.
Primerica, Inc. PRI provides financial products and services. It assists its clients in meeting their needs for term life insurance, which it underwrites, and mutual funds, variable annuities and other financial products, which it distributes primarily on behalf of third parties. It has an average four-quarter positive earnings surprise of 1% 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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