Investors don’t need to pick between growth and value — at least not entirely. Growth at a reasonable price stocks — or GARP stocks — are a good fit for investors who are looking for equities that can rise significantly over the longer time, but are wary about owning expensive shares. These investors are looking for companies with relatively cheap stocks, growing businesses, and good long-term growth prospects.
For investors looking for GARP stocks, here are 4 to check out today.
GARP Stocks to Buy: Best Buy (BBY)
Best Buy Co Inc (NYSE: BBY) stock is trading at a forward price to earnings ratio of under 14, and its price to sales ratio is a tiny 0.48. In the first quarter, the company’s non-GAAP earnings per share jumped 37% versus the same period a year earlier to 82 cents, while its domestic same-store sales surged 7.1% year-over-year. Disappointment over the 12% increase in Best Buy’s online sales fueled a large drop in Best Buy stock in the wake of the results. Still, the company’s financial metrics and its core brick and mortar business are clearly quite strong, making Best Buy stock quite attractive at its current bargain-basement valuation.
The company has multiple positive catalysts going forward. Specifically, many brand new electronic devices — including drones, smart TVs, and virtual reality tools — are becoming more popular. Many consumers will want information about these products, and Best Buy’s stores are a great place to obtain such information. Going forward, many more new devices — like robots and wearables — look poised to proliferate, further boosting Best Buy’s results and Best Buy stock.
The Supreme Court’s recent decision to allow states to impose sales taxes on retailers with no physical presence within their borders will also probably help Best Buy. In the past, many consumers who were looking to purchase a $1,000 large-screen, smart TV probably bought it online in order to save $70 or so in taxes. Now that consumers will have to pay sales taxes on nearly all online purchases, many more shoppers will probably decide to go to a Best Buy store — where they can look at the TVs and ask questions about them before buying them — rather than purchasing a TV online.
GARP Stocks to Buy: SodaStream (SODA)
After struggling for several years , SodaStream International (NASDAQ: SODA) stock has rebounded sharply. Since its lows in early 2016, SodaStream stock has jumped nearly 600%.
The main catalyst for the rebound was SodaStream’s decision to capitalize on the trend towards healthier drinks by emphasizing sparkling water beverages. A second catalyst was the company’s expansion in Japan, where its products have become quite popular.
Despite the huge rally in SodaStream stock, the shares are still trading at a reasonable price, given the company’s recent growth rates. In the first quarter, SodaStream’s revenue jumped 25% year-over-year to a record $144 million and its earnings per share surged 23% to 81 cents. The company’s gross margin came in at an impressive 55.2%, up 0.25 percentage points year-over-year. Despite the strong growth and great results, SodaStream stock is trading at a reasonable forward price to earnings ratio of around 20.
Importantly, SodaStream’s Americas revenue jumped 39% year-over-year, with U.S. revenue rising 33%, Canadian revenue jumping 44%, and U.S. sparkling water maker sales surging 39%. The increase suggests that SodaStream’s sparkling water strategy is gaining significant traction in North America, where the company has long had difficulty equaling its penetration rates in Western Europe.
The company’s sales in the Asia Pacific region surged 28% in the first quarter. According to the company’s CEO, Daniel Birnbaum, the increase in revenue was “led by ongoing strength in Australia and Japan.” In Japan, “sparkling water maker sales were particularly strong,” said Birnbaum. In recent years, SodaStream’s sales in Japan have been boosted by the popularity of a Japanese whiskey soda drink that can be made with the company’s sparkling water machine.
GARP Stocks to Buy: Starbucks Stock (SBUX)
In Starbucks’ (NASDAQ: SBUX) fiscal Q2, global comparable sales rose 2% year-over-year, as comp sales in the U.S. increased 2% and China comps climbed 4%. Moreover, Starbucks’ non-GAAP earnings per share surged 18% year-over-year. Trading at a forward price to earnings ratio of 18 and carrying a 3% dividend yield, Starbucks’ stock is pretty cheap.
Investors are probably worried about the departure of Howard Schultz, the company’s founder who steeped down as executive chairman of the company on June 26. Additionally, after the company’s CFO, Scott Maw, announced on June that he would also resign, effective November, Starbucks stock fell significantly.
But the CEO of Starbucks, Kevin Johnson, has been running the day-to-day affairs of the company for over a year, and it seems to be performing decently on his watch. Maw, who had been on the job for four years, was hired when Schultz was the CEO. With Schultz leaving, Maw was probably asked to depart because Johnson wants to hire his own person for the role.
Starbucks’ growth does appear to be slowing, but Johnson seems to be taking several steps that should reinvigorate the company’s growth. Importantly, the company recently pledged to “leverage…consumer behavior trends towards health and wellness.” In conjunction with that goal, Starbucks announced on June 26 that it would begin selling six premium Teavana teas to groceries. By following in SodaStream’s footsteps and seeking to exploit the trend towards health and wellness, Starbucks could enjoy a similar renaissance.
Meanwhile, Starbucks is also stepping up its digital ad initiatives, and Johnson’s extensive background in tech gives those initiatives a greater chance of succeeding. Starbucks plans to return $25 billion to shareholders through fiscal 2020, and the company is significantly cutting costs. Finally, Starbucks plans to “eventually” open 1,000 new, premium “reserve cafes.” Featuring high ticket drinks and premium, new baked goods, one such cafe generated $3 million in revenue, “about twice what a typical Starbucks makes,” Business Insider reported, according to Madison.com.
GARP Stocks to Buy: General Motors (GM)
Trading at an anemic price to earnings ratio of six and carrying a dividend yield of nearly 4%, General Motors (NYSE: GM) stock is definitely trading at a reasonable price.
Driven by multiple factors, GM stock will improve significantly over the long-term.
The automaker’s results in China are set to improve significantly, while it is poised to be one of the leaders in the driverless and electric car revolutions.
GM stock should continue to be boosted by the company’s strong position in China, the world’s largest auto market. In 2017, GM sold over 4.04 million vehicles in China, representing market share of 14.3%, up from 3.9 million vehicles and 13.8% in 2016.
Although Moody’s only expects China’s auto market to grow 2% in 2018 and 2.5% in 2019, the sales of GM vehicles should be able to grow a bit faster than the overall market, as it did in 2017. And importantly, GM’s sales of its highly profitable SUV’s surged 37% last year in China. Given China’s rapidly expanding economy and the continuing popularity of the automaker’s Cadillac and Buick brands in the country, that trend should continue, lifting GM stock.
GM should also benefit from China’s decision to relax ownership restrictions on foreign automakers. GM will probably respond by increasing its stake in its Chinese joint ventures, enabling the American company to keep a greater share of the ventures’ profits. Since China completely eliminated foreign ownership restrictions on electric car ventures this year, and given GM’s popularity in the country, GM could very well soon launch a highly successful electric car venture there.
Speaking of GM’s electric cars, GM’s electric vehicles have sold rather well in the U.S. For example, in May 2018 GM sold an estimated 3,000 electric cars in the U.S. — tying it for second place with Toyota Motors Corporation (NYSE: TM). As electric cars proliferate over the longer term, GM should benefit meaningfully, boosting GM stock in the process.
Finally, GM has become a leader in the driverless car space. In May, GM announced that its driverless car unit, Cruise, would receive a $2.25 billion investment from Japan’s SoftBank. Of course, the investment represents a tremendous vote of confidence in Cruise and its technology. GM has said that its driverless cars could be profitable by 2025. Moreover, profit margins from driverless cars incorporated into ride-hailing fleets are expected to be much higher than cars that are sold through dealerships.
As of this writing, Larry Ramer did not own shares of any of the stocks named.
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