Investors most often bank on a strategy that brings the best of both value and growth investing. Growth at a reasonable price or GARP is one such strategy that is potent enough to yield higher returns. It is used to identify stocks that have solid growth prospects but are available at discounted prices. 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
Both strong earnings growth history and impressive earnings growth prospects in the coming years 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 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 flows get precedence in GARP investing.
GARP investing gives precedence to one of the popular value metrics – price-to-earnings (P/E) ratio. Though this investing style chooses 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 we 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 six.
Here are the six stocks that made it through the screen:
CBS Corporation CBS is a mass media company that creates and distributes industry-leading content to audiences worldwide. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 6.2%.
Cognizant Technology Solutions Corporation CTSH delivers high-quality, cost-effective, full life cycle solutions to complex software development and maintenance problems. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 7.3%.
IPG Photonics Corporation IPGP is the world leader in high-power fiber lasers and amplifiers. It has an average four-quarter positive earnings surprise of 2.1%. The stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Arch Capital Group Ltd. ACGL is a diversified financial services holding company, with an emphasis on the insurance sector. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 9.3%.
Raymond James Financial, Inc. RJF is a holding company whose subsidiaries are engaged principally in the securities brokerage business. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 9.5%.
F5 Networks, Inc. FFIV is a leading provider of integrated Internet traffic and content management solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 3.4%.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Zacks Investment Research