If you’re looking for a profitable portfolio of stocks that will offer the best of value and growth investing, try the growth at a reasonable price or GARP strategy. It helps an investor gain exposure to stocks that are undervalued and have impressive growth prospects.
However, one should not confuse GARP investing with the blend strategy. While the blend strategy promotes investment in both value and growth stocks, GARP investing requires both value and growth features in a single stock.
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.
Strong earnings growth history and impressive earnings prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, pursuing stocks with a more stable and reasonable growth rate is also a tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the 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 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 also considered.
Using the GARP principle, we have run a screen to identify stocks that should 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) to make the strategy foolproof.
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 indicates that the stocks are undervalued.)
These few criteria have narrowed down the universe of over 7,700 stocks to only 16.
Here are seven of the 16 stocks that made it through the screen:
Teradyne, Inc. (NYSE:TER) is a leading supplier of automation equipment for test and industrial applications. The company delivered an average four-quarter positive earnings surprise of 20.3% and carries a Zacks Rank #1.
MSCI Inc (NYSE:MSCI) is an independent provider of research-driven insights and tools for institutional investors. The company delivered an average four-quarter positive earnings surprise of 7.4% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
S&P Global Inc (NYSE:SPGI) is a provider of ratings, benchmarks, analytics and data to the capital and commodity markets. The company came up with an average four-quarter positive earnings surprise of 12.8% and carries a Zacks Rank #2.
Marriott International Inc (NASDAQ:MAR) is the world’s largest hotel company. The company delivered an average four-quarter positive earnings surprise of 11.8% and carries a Zacks Rank #2.
Encompass Health Corp (NYSE:EHC) provides inpatient rehabilitation hospitals and home-based care services. The company came up with an average four-quarter positive earnings surprise of approximately 7% and carries a Zacks Rank #2.
Nucor Corporation (NYSE:NUE) manufactures and sells steel and steel products in the United States and internationally. Last quarter the company delivered a positive earnings surprise of 18.2% and carries a Zacks Rank #2.
Fair Isaac Corporation (NYSE:FICO) makes decisions smarter. The company’s solutions and technologies for Enterprise Decision Management give businesses the power to automate more processes, and apply more intelligence to every customer interaction. Last quarter, the company delivered a positive earnings surprise of 15%. It 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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