5 GARP Stocks For A Winning Portfolio

Investors on the lookout for stocks with the potential for maximum growth and value investing may consider the growth at a reasonable price or GARP strategy.

This popular strategy helps investors gain exposure to stocks with impressive growth prospects that are trading at a discount. GARP investing employs popular value metrics — price-to-earnings (P/E) and price-to-book value (P/B) ratio — to evaluate whether a stock is undervalued.

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.

Growth Metrics

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 20% 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.

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 also considered.

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