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Add These 7 GARP Stocks to Enhance Your Portfolio Returns

Zacks

Growth at a reasonable price or GARP is an excellent way for investors to make some quick gains. This strategy helps investors gain exposure to stocks that have impressive prospects and are trading at a discount.

The GARP approach leads to the identification of stocks that are priced below the market or any reasonable target determined by fundamental analysis. These stocks also have solid prospects in terms of cash flow, revenues, earnings per share (EPS) and so on.

That means a portfolio created on the basis of GARP strategy is expected to have stocks that offer the best of both value and growth investing.

Growth Metrics

Strong earnings growth and solid prospects are the main concepts that GARP investors borrow from the growth investing strategy. However, instead of super-normal growth rates, picking stocks with a more stable and reasonable growth rate is a preferred tactic of GARP investors. Hence, growth rates between 10% and 20% are considered ideal under the 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.

Value Metrics

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 another value metric that is considered.

Using the GARP principle, we have run a screen to identify stocks that are likely to offer solid returns in the near term.

Screening Parameters

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.)

These few criteria have narrowed down the universe of over 7,700 stocks to only 13.

Here are seven of the 13 stocks that made it through the screen:

Grand Canyon Education, Inc. LOPE is a regionally accredited provider of online postsecondary education services focused on offering graduate and undergraduate degree programs in its core disciplines of education, business, and healthcare. This Zacks Rank #1 stock has delivered an average four-quarter earnings surprise of 12.3%.

VMware, Inc. VMW provides virtualization solutions from the desktop to the data center. The company delivered an average four-quarter positive earnings surprise of 3.8%. It sports a Zacks Rank #1.

PetMed Express, Inc. PETS is a leading nationwide pet pharmacy. This Zacks Rank #2 stock has come up with an average four-quarter earnings surprise of 32.9%.

Hill-Rom Holdings, Inc. HRC traces its roots back to 1929 when William A. Hillenbrand formed the company as a division of Hillenbrand Industries. At that time, the company was focused on developing innovative beds and furnishings for hospital patient rooms. Now, after nearly 18 years, Hill-Rom leads the way as an innovator in the medical technology field developing solutions that enhance outcomes for patients and their caregivers. The company pulled off an average four-quarter positive earnings surprise of 7.9%. It carries a Zacks Rank #2.

Universal Health Services, Inc. UHS is one of the nation's largest and most respected healthcare management companies, operating through its subsidiaries, behavioral health facilities, acute care hospitals and ambulatory centers throughout the United States, the United Kingdom and Puerto Rico. The Zacks Rank #2 stock delivered a positive earnings surprise of 8.7% last quarter.

Asbury Automotive Group, Inc. ABG is one of the largest automotive retailers. Last quarter, the stock came up with a positive earnings surprise of 13.1%. Asbury Automotive has a Zacks Rank #2.

inTEST Corporation INTT is an independent designer, manufacturer and marketer of ATE interface solutions and temperature management products, which are used by semiconductor manufacturers to perform final testing of integrated circuits and wafers. The Zacks Rank #2 stock delivered a positive earnings surprise of 121.4% last quarter.

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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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