Growth at a reasonable price or GARP is an excellent strategy to earn quick profits out of investments. The GARP approach leads to identification of stocks that are priced below the market or any reasonable target determined by fundamental analysis.
Further, the strategy helps investors in gaining exposure to stocks that have impressive prospects and are trading at a discount. GARP 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.
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 25% 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 25% (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 four of the six stocks that made it through the screen:
Microsoft Corporation MSFT is a broad-based technology provider whose offerings comprise operating systems, cross-device productivity applications, server applications, business solution applications, desktop and server management tools, software development tools and video games. The company currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Microsoft has returned 53.7% on a year-to-date basis. It has a trailing four-quarter earnings surprise of 14.75%, on average.
East West Bancorp EWBC serves as a financial bridge between the United States and Greater China by providing various personal and commercial banking services to small and medium-sized businesses, business executives, professionals, and other individuals. The company currently carries a Zacks Rank #2.
East West Bancorp has appreciated 57.4% on a year-to-date basis. EWBC has a trailing four-quarter earnings surprise of 11.79%, on average.
CDW Corporation CDW is a leading provider of integrated information technology (IT) solutions to small, medium and large business, government, education and healthcare customers. The company carries a Zacks Rank #2 currently.
CDW has returned 57% on a year-to-date basis. The company has a trailing four-quarter earnings surprise of 12.17%, on average.
Automatic Data Processing ADP is a provider of cloud-based Human Capital Management technology solutions including payroll, talent management, Human Resources and benefits administration, and time and attendance management. The company carries a Zacks Rank #2.
Automatic Data Processing has gained 40.8% on a year-to-date basis. ADP has a trailing four-quarter earnings surprise of 9.65%, on average.
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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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Microsoft Corporation (MSFT) : Free Stock Analysis Report
Automatic Data Processing, Inc. (ADP) : Free Stock Analysis Report
East West Bancorp, Inc. (EWBC) : Free Stock Analysis Report
CDW Corporation (CDW) : Free Stock Analysis Report
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