It turns out you can sometimes have your cake and eat it too in investing. That is what growth-at-a-reasonable price (GARP) investing is all about. These are growth stocks to buy at value prices. For the purposes of this article, growth stocks are those companies with high and consistent earnings growth. They tend to have high valuations. Value stocks are those with low price-to-earnings (P/E) multiples. Therefore, by combining these two you get a growth-at-a-reasonable price (GARP) stock.
One way to find a GARP stock is to compare its earnings growth rate to its price-earnings ratio. This is known as the PEG ratio (P/E to growth). Actually, mathematically, the growth rate is multiplied by 100 in this ratio. For example, a stock with a 20 times P/E with a 20% growth rate has a PEG ratio of 1.0 (20 divided by 0.20 times 100).
The list below of seven GARP stocks to buy are those with 20% growth rates or higher and PEG multiples of less than 1.0. This ensures that the stock is at a very attractive value multiple, usually well less than 15 times earnings. In fact, the average PEG ratio in this list is less than 0.5 times.
Here is the list of GARP stocks to buy:
- Qualcomm (NASDAQ:QCOM)
- PulteGroup (NYSE:PHM)
- Ameriprise Financial (NYSE:AMP)
- NVR, Inc (NYSE:NVR)
- T Rowe Price (NASDAQ:TROW)
- eBay (NASDAQ:EBAY)
- KLA Corp (NASDAQ:KLAC)
Let’s dive and look at these GARP stocks.
GARP Stocks To Buy: Qualcomm (QCOM)
Market Capitalization: $156 billion
Qualcomm is a major telecom chip designer and holds many CDMA and 5G semiconductor chip patents used by smartphone manufacturers. Its Snapdragon SoCs (system-on-a-chip) chips are also very popular with smartphone makers. They cost-effectively combine CPUs, GPUs and broadband modems on one chip. In addition, the company has a huge portfolio of telecom chip patents.
All of this means that the company has a recurring source of cash flow and profits. Fortunately, QCOM is not that expensive as well. Its September 2021 expected non-GAAP earnings per share (EPS) is $7.35, or 75% higher than its $4.19 rate for the year ending September 2020.
However, the stock has a forward 2021 P/E ratio of just 18.8 times. This makes its PEG ratio very low since 18.8 divided by 75 (i.e., 0.75 x 100) is just 0.25. Since this is well below 1, the PEG multiple is considered very attractive.
That’s great. But keep in mind that the company is not going to grow at 75% each year. For example, next year EPS is forecast to be $8.18, or just 11.3% higher. As its September 2022 P/E ratio is 16.9 times, the PEG ratio is much higher than before at 1.50 (i.e., 16.9 / 11.3). However, the average PEG ratio between both years, at 0.25 and 1.50 is still below one times at 0.875. This indicates that QCOM stock is one of the cheap GARP stocks to buy.
Market Capitalization: $14.2 billion
Atlanta-based PulteGroup has several home-building divisions, including Pulte Homes, Del Webb, Centex, DiVosta Homes, America West, John Wieland Homes, and Neighborhoods. The company is growing quickly as people return to home buying after being locked down. Sales this year are forecast to grow 23.1% to $13.59 billion. This puts it on a cheap price-to-sales multiple of a little over one time, as its market cap is $14.15 billion.
Moreover, analysts expect non-GAAP EPS will rise around 30% this year ending December to $6.21, up from $4.79 last year. Moreover, since PHM stock has a cheap P/E ratio for 2o21 of just 8.7 times, the resulting PEG multiple is also very low. This is seen by dividing 8.7 by 29.9 (i.e. 0.29 x 100), or 0.29. Again we see a PEG below 1.0, a good indication of one of the cheap GARP stocks to buy.
However, analysts expect earnings growth to slow a bit in 2022. EPS is forecast to rise to $6.96, or just 11.6% higher. The P/E ratio for PHM stock in 2022 is 7.8 times. The resulting PEG ratio is still below 1.0, as the calculation results in a ratio of 0.67 (i.e, 7.8 / (0.116 x 100), or 0.67).
In other words, as we’ve been discussing, the average PEG ratio for the next two years is well below 1.0. This makes PHM stock a cheap GARP stock.
Ameriprise Financial (AMP)
Market Capitalization: $28.4 billion
Minneapolis-based Ameriprise Financial is an asset management, wealth management, and retirement solutions company. The company offers financial planning for regular-sized investors and also portfolio management services for its high-net-worth (HNW) and institutional clients. This is an extremely profitable business with good recurring sales and income. Fortunately, though, AMP is not that expensive, making it one of the attractive GARP stocks to buy.
Analysts foresee EPS rising by 39.6% to $19.65 this year on a non-GAAP basis from $14.08 in 2020. Next year, they see EPS growth slowing to 10.4% to $21.70. But since the forward P/E ratios for 2021 and 2022 are just 12.7x and 11.5 times, the resulting PEG multiples are very low.
For example, the 2021 PEG ratio is just 0.32 (i.e., 12.7 / (0.396 x 100), or 12.6/39.6 = 0.32). The same calculation for 2022 results in a multiple of just 1.10 (i.e., 11.5 / 10.4). Therefore, the average PEG ratio for the next two years is well below 1.0 at 0.71 times. The growth rates are greater on average than the price paid for that growth. This makes AMP stock one of the cheap GARP stocks to buy.
NVR, Inc (NVR)
Market Capitalization: $17.7 billion
Reston, VA-based NVR is also another cheap home builder and mortgage banker. It has three divisions, of which probably the most well known is its Ryan Homes division, which caters to first-time home buyers. Its NV Homes and Heartland Homes homes divisions sell new homes to move-up and luxury homebuyers.
Earnings are forecast to rise by 37.4% this year ending December and by 9.9% next year, according to Seeking Alpha. For example, non-GAAP EPS of $230.11 in 2020 is foreseen as hitting $316.24 in 2021 and $347.45 in 2022.
However, since NVR is so cheap, just like PHM stock described earlier, its PEG multiples are also very low. For example, the forecast P/E ratio for 2021 is 15.8 times and for 2022 it is 14.3 times. That implies that the 2021 PEG ratio is 0.42 (15.8 divided by 37.4) and for 2022 it is 1.45. Therefore, the average PEG over the next two years is just 0.94.
In other words, the growth rates are greater on average than the price paid for that growth over the next two years. This, again, makes NVR a great GARP stock.
T Rowe Price (TROW)
Market Capitalization: $40.2 billion
T Rowe Price is a global mutual fund and separate account manager based in Baltimore, but with offices around the world. As of March 31, the company had $1.52 trillion in assets under management (AUM). Over half of this AUM amount was from mutual funds, or $816 billion, and the rest from sub-advised or separate accounts that it manages. The company’s earnings revolve around net inflows as well as the market performance and its outperformance (or not).
Nevertheless, analysts expect earnings to hit $12.19 EPS this year, up 27.2% from $9.58 on a non-GAAP basis in 2020. However, next year, EPS is seen as rising just 5.3% to $12.84 per share. But TROW stock is still cheap at 14.6 times earnings this year and a 13.8 P/E ratio next year.
As a result, the PEG ratio for 2021 is 0.54 (i.e., 14.6 / 27.2) and for 2022 it is 2.60. The average for both years is 1.57, which is over 1.0 but not by much. For example, I suspect as we get closer to 2022 the growth rate in earnings per share could easily pick up from 5.3%. That will lower the 2022 PEG rate and the overall average PEG multiple. As it stands, the price of TROW stock is only 1.57 times its average growth rate, which is reasonable. It makes the stock one of the attractive GARP stocks to buy.
Market Capitalization: $43.4 billion
eBay is a well-known online auction software platform. The company makes revenue by charging fees on each auction, known as its Gross Merchandise Volume (GMV). Last year the company had $100 billion in GMV which produced $10.3 billion in revenue. That implies that its “take rate” or revenue divided by GMV is 10.3%. This is a very high take rate compared to many of its peers. This makes eBay a very profitable business.
Last year the company produced earnings of $3.41 per share, on a non-GAAP basis. This was 20.5% higher than in 2019. Moreover, in 2021 EPS is forecast to hit $4.06, up 19.1%, and for 2022 $4.58, up 12.8%. But since the P/E multiples for 2021 and 2022 are low, at 16.0 and 14.2 respectively, the PEG ratios are very low.
For example, for 2021 the PEG ratio is calculated as 0.84 (i.e., 16 / 19.1), and for 2022 the PEG is 1.11 (i.e., 14.2 / 12.8). Therefore, over both years, the average PEG multiple is 0.97 or basically 1.0.
This means that the average P/E ratio is equal to the average growth rate over both years. That is a hallmark of being one of the cheap GARP stocks to buy.
KLA Corp (KLAC)
Market Capitalization: $51.9 billion
KLA Corp is a semiconductor manufacturing solutions company. It provides yield management software for semiconductor and nanoelectronics industries. For example, it provides computational lithography software, and data analytics systems to manage semiconductor production yield for chip-makers.
Given the present chip shortage, its services are in high demand. For the year ending June 2021, EPS is forecast as hitting $13.40 on a non-GAAP basis, up 29.5% from $10.35 last June. For the year ending June 2022, EPS is foreseen as reaching $14.68, up 9.55%.
Although its P/E multiples for 2021 and 2022 are fairly high, they are not so expensive in terms of comparison with their growth rates. That is what the PEG ratios show. For example, although the 2021 forward P/E multiple is 24.9 times, its PEG ratio is just 0.84.
Similarly, the 2022 P/E is 22.8, but the PEG multiple is 2.55 times. The average over both years is 1.70 times, which is over 1.0 times, but not that high as reaching 2.0 times. In other words, the price paid for the high growth is not more than a little over 1.5 that growth rate. This also makes it a good GARP stock, albeit on the higher end of the spectrum.
The table below shows the results of our list of seven stocks to buy with a growth-at-a-reasonable price. It shows the stocks ranked by their 2021 PEG ratios, as well as the numbers used to calculate the ratios.
You can use this table to update your own earnings estimates and to see how the PEG multiples were calculated. You can see that the bottom line shows that the average PEG of both years for all these stocks is 1.03 times. In other words, over the next two years, the average P/E ratio is about the same as the average growth rate. That makes these good GARP stocks to buy as a group.
On the date of publication, Mark R. Hake did not hold any long or short position in any security mentioned in this article.