Combining Growth with Value
GARP stands for Growth At a Reasonable Price. This style of investing essentially involves locating Growth stocks that are not overly expensive but will usually exclude stocks that are overly cheap.
GARP investors still look for earnings growth, its just that these investors are a little concerned about what happens when a high flying expensive growth stock suddenly stops growing. By limiting the price paid the GARP investor also limits their risk.
The GARP investor can be thought of as a more conservative growth investor. Someone who will Not pay any silly high price that the market is asking!
It’s common for investors to use the PE ratio to determine if a company is expensive. A popular valuation method used by GARP investors is the PEG ratio. This ratio includes the companies’ annual earnings growth which is an average (usually over the last five years but can be less).
The PEG ratio multiplies the PE ratio by the annual earnings growth as a decimal number. For example, a PE ratio of 20 with an earnings growth of 10% (which is a decimal of 0.10) gives a PEG of (20×0.10) which is 2.0.
Stocks are considered very expensive with a PEG ratio above 2.0 and cheap with a PEG ratio below 1.0. While it’s a personal preference, GARP investors often select stocks with a PEG ratio between 1.0 and 2.0.
The returns from GARP investing usually fall between that of growth investing and value investing. Growth investing usually performs well in strong bull markets which can hinder value investing returns.
Some GARP investors are fairly short-term in their view and are concerned with a growth in the quarterly earnings whilst others have a long-term view and focus on the annual earnings.
As a general rule, GARP investors are similar to growth investor and are not interested in dividends; they are only looking for a capital gain.
Most GARP investors take a simple approach and generally they avoid digging through the financial reports but rather they will simply take stocks from a list that they like – very few will conduct any detailed analysis themselves as this is quite time consuming.
The following GARP Portfolio is hypothetical and the stocks were selected from the August 2017 eMagazine Revenue Growth Stocks list. The purchase price is based on prices from a year ago on Aug 2, 2017.
Note: The following stocks were selected for educational purposes only and past performance is no guarantee for future performance.
The GARP Portfolio
The portfolio shown in Table 1. below is constructed based on selecting growth stocks with a PEG ratio between 1.0 and 2.0.
Table 1. GARP Stocks
The stock charts for the GARP stocks in Table 1. are shown as follows.
Chart 1. GARP stock – FB
Chart by stockcharts.com
Chart 2. GARP stock – NTES
Chart by stockcharts.com
Chart 3. GARP stock – NOAH
Chart by stockcharts.com
Chart 4. GARP stock – CBPO
Chart by stockcharts.com
Chart 5. GARP stock – LOPE
Chart by stockcharts.com