Growth at a reasonable price or GARP is an excellent way for investors to make some quick gains. This strategy helps investors gain exposure to stocks that have impressive prospects and are trading at a discount.
The GARP approach leads to the identification of 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.
That means a portfolio created on the basis of GARP strategy is expected to have stocks that offer the best of both value and growth investing.
Strong earnings growth and solid 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.
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 are likely to offer solid returns in the near term.
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 indicate that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only 14.
Here are seven of the 14 stocks that made it through the screen:
MSCI Inc. MSCI is an independent provider of research-driven insights and tools for institutional investors. The company has an average four-quarter positive earnings surprise of 3.9% and carries a Zacks Rank #1.
American Financial Group, Inc. AFG is a holding company which, through its subsidiaries, is engaged primarily in private passenger automobile and specialty property and casualty insurance businesses and in the sale of tax-deferred annuities and certain life and supplemental health insurance products. The stock has an average four-quarter positive earnings surprise of 26.3% and carries a Zacks Rank #1.
The Home Depot Inc. HD is the world's largest home improvement retailer. The company has an average four-quarter positive earnings surprise of 3.9% and carries a Zacks Rank #2.
AbbVie Inc. ABBV is a global, research-based biopharmaceutical company. The stock has an average four-quarter positive earnings surprise of 1.8% and carries a Zacks Rank #2.
Lazard Ltd. LAZ is a preeminent international financial advisory and asset management firm that has long specialized in crafting solutions to take care of complex financial and strategic challenges faced by their clients. The company has an average four-quarter positive earnings surprise of 16.1% and carries a Zacks Rank #2.
Carter's, Inc. CRI is a leading provider of apparel and related products exclusively for babies and young children. The stock has an average four-quarter positive earnings surprise of 8.9% and carries a Zacks Rank #2.
First American Financial Corporation FAF provides financial services through its Title Insurance and Services segment and its Specialty Insurance segment. The stock has an average four-quarter positive earnings surprise of 12.7% and carries 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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MSCI Inc (MSCI) : Free Stock Analysis Report
AbbVie Inc. (ABBV) : Free Stock Analysis Report
Home Depot, Inc. (The) (HD) : Free Stock Analysis Report
Lazard Ltd. (LAZ) : Free Stock Analysis Report
First American Corporation (The) (FAF) : Free Stock Analysis Report
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
Carter's, Inc. (CRI) : Free Stock Analysis Report
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