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.
Unlike a blend strategy, a portfolio that uses GARP investing is expected to include stocks that offer the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
The GARP approach helps to zero in on 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 aspects 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 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.
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 seven.
Here are five of the seven stocks that made it through the screen:
Anthem Inc (NYSE:ANTM) is a health care company. It provides medical products through its subsidiaries. The company delivered an average four-quarter positive earnings surprise of 7.2%. It carries a Zacks Rank #2.
Grand Canyon Education Inc (NASDAQ:LOPE) is a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in its core disciplines of education, business, and healthcare. This Zacks Rank #2 stock delivered an average four-quarter earnings surprise of 11.9%.
PetMed Express Inc (NASDAQ:PETS) is a leading nationwide pet pharmacy. This Zacks Rank #2 stock came up with an average four-quarter earnings surprise of 25.7%.
Dollar General Corp. (NYSE:DG) is a discount retailer in the United States. This Zacks Rank #2 stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, delivering a positive average earnings surprise of 2.3%.
XO Group, Inc. (NYSE:XOXO) is a media and technology company. It provides information, products and advice related to weddings and pregnancy. The stock surpassed the Zacks Consensus Estimate thrice in the trailing four quarters while matching the same on one occasion, delivering a positive average earnings surprise of 148.9%.%. 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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