Stocks that are available at a discount and are poised to record strong growth have always been on investors’ radar for both growth as well as value investing. Growth at a reasonable price or GARP investing is a strategy that seeks to achieve this aim.
Investors following this strategy pick undervalued stocks with strong earnings growth history and prospects. While this appears similar to the blend strategy, there is a thin line of difference. While the blend strategy chooses value and growth stocks, the GARP strategy seeks to identify stocks that provide the best of both value and growth investing.
GARP Metrics – Mix of Growth & Value Metrics
Strong earnings growth history and impressive earnings growth prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, they choose stocks with a more stable and reasonable growth rate instead of choosing those with extremely high growth rates. Growth rates between 10% and 20% are considered ideal in the GARP strategy.
Another growth metric that is considered by both growth and GARP investors is return on equity (ROE). GARP investors look for stronger and higher ROE compared with the industry average to identify superior stocks. Moreover, stocks with positive cash flows get precedence in GARP investing.
GARP investing gives precedence to one of the popular value metrics – price-to-earnings (P/E) ratio. Though followers of this investing style choose stocks with higher P/E ratios compared to value investors, they avoid picking companies with extremely high P/E ratios.
Moreover, price-to-book value (P/B) ratio is another value metric that is considered in GARP investing.
Using GARP principles, we have run a screen to identify stocks that should offer good returns in the near term.
Along with the criteria discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.
• 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 indicate that the stocks are undervalued.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only eight.
Here are five stocks from the eight that made it through the screen:
Tenneco Inc. TEN is one of the world's largest designers, manufacturers and marketers of emission control and ride control products and systems. This Zacks Rank #1 company has an average four-quarter positive earnings surprise of 10.5%.
WNS (Holdings) Ltd. WNS is a recognized leader in business process outsourcing. This Zacks Rank #2 company has an average four-quarter positive earnings surprise of 4.5%.
AngioDynamics Inc. ANGO is a leading provider of innovative medical devices used by interventional radiologists, vascular surgeons and other physicians. It has an average four-quarter positive earnings surprise of 8.5% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Teleflex Incorporated TFX is primarily engaged in manufacturing, developing and supplying medical devices for different procedures in the medical industry throughout the globe. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 7.1%.
j2 Global, Inc. JCOM provides cloud-based communications and storage messaging services. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 5.9%.
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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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