Investors on the lookout for stocks with the potential to offer the best of growth as well as value investing may consider the growth at a reasonable price or GARP strategy.

However, one should not confuse GARP investing with the blend strategy. While the blend strategy promotes investment in both value and growth stocks, GARP investing requires both value and growth features in a single stock.

GARP Metrics – Mix of Growth & Value Metrics

The GARP approach prefers 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.

Growth Metrics

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, 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 should 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) to make the strategy foolproof.

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 M-industry average (P/E and P/B ratios less than that of the industry indicates that the stocks are undervalued.)

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

Here are four stocks that made it through the screen:

Pasadena, CA-based East West Bancorp Inc. (EWBC – Free Report) is the holding company for East West Bank, East West Capital Trust I, East West Capital Trust II and Risk Services Inc. The company has an average four-quarter positive earnings surprise of 9.35% and carries a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Minnetonka, MN-based UnitedHealth Group Inc (UNH – Free Report) is a diversified health and well-being company. It has an average four-quarter positive earnings surprise of 4.67% and carries a Zacks Rank #2.

Los Angeles CA-based CBRE Group Inc. (CBG – Free Report) operates as a commercial real estate services and investment company. It has an average four-quarter positive earnings surprise of 13.54% and carries a Zacks Rank #2.

Plano, TX-based Alliance Data Systems Corp (ADS – Free Report) is a leading provider of transaction services, credit services and marketing services to retail companies. The stock has an average four-quarter positive earnings surprise of 2.15% and carries a Zacks Rank #2.

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