Growth at a reasonable price, or GARP, provides an excellent opportunity for investors who are interested in raking in healthy returns. It helps an investor gain exposure to stocks that have impressive prospects and are undervalued.
Unlike a blend strategy, a portfolio that uses GARP investing is expected to have stocks that offer the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
The GARP strategy seeks to offer an ideal investment by utilizing the best features of both value and growth investing. Investors adopting the GARP approach will prefer to buy stocks that are priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in cash flow, revenues, earnings per share (EPS) and so on.
Both 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).
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.)
Here are five of the six stocks that made it through the screen:
Cigna (NYSE:CI) provides services related to healthcare insurance and benefits, funding and investment plans. The company has a Zacks Rank #1 and delivered an average positive earnings surprise of 15.7% in the trailing four quarters.
American Financial Group (NYSE:AFG) is involved in property and casualty insurance, with focus on specialized commercial products for businesses. The company delivered an average four-quarter positive earnings surprise of 26.7%. It has a Zacks Rank #2.
CBRE Group (NYSE:CBRE) offers commercial real estate services to tenants, owners, lenders and investors in office, retail, industrial, multi-family and other types of commercial real estates globally. The company has a Zacks Rank #2 and delivered an average four-quarter earnings surprise of 14.4%.
First American Financial (NYSE:FAF) provides financial services through its Title Insurance and Services segment as well as its Specialty Insurance segment. The company carries a Zacks Rank #2. It delivered an average earnings surprise of 2.4% in the trailing four quarters.
Allegion (NYSE:ALLE) is a leading provider of security products and solutions for business and domestic purposes. The company delivered an average positive earnings surprise of 6.1% in the trailing four quarters. 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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