Growth at a Reasonable Price (GARP) Stock Investing

By Stock Research Pro • February 11th, 2009

The GARP strategy of investing seeks to combine and balance both value and growth investing. GARP investors look for stocks that are undervalued and show potential for significant, sustainable growth. A GARP investor can often find those companies that fall that have been passed over by pure value or pure growth investors. The goal is to avoid the extremes of the growth and value investors by finding reasonably priced growth-oriented stocks. GARP investors do not simply balance their portfolio with an equal number of growth and value stocks. Instead, each stock must have characteristics of both.

A Well-Known GARP Investor

Peter Lynch, who has written several popular books, including “One Up on Wall Street”, is a well-known GARP investor. As manager of the Fidelity Magellan fund, he earned investors a 29% average annual return from 1977-1990.

Done properly, GARP investing meets an admirable set of criteria in finding solid companies with good growth prospects and minimal risk, all at a good price.

Finding GARP Stocks

The criteria a GARP investor will evaluate in making an investment decision include:

Growth: GARP investors, like growth investors, look for companies with solid growth prospects. In qualifying companies for this, they will look for companies that have seen positive earnings over the past several years with projections for positive earnings into the future. In avoiding the extremes of the growth investor, however, GARP investors tend to look at companies with growth projections of 10-25%. To the GARP investor, this predicted range offers a more realistic and predictable opportunity for investment.

Return-on-Equity (ROE): GARP investors also take a hard look at the company’s return-on-equity (ROE) as a high (relative to the company’s industry competitors) and growing ROE are likely to see higher earnings and increasing free cash flow.

PEG Ratio: Another key statistic for a GARP investor is the price/earnings to growth (PEG) ratio. The PEG ratio is calculated by taking the price/earnings (P/E) ratio and dividing by earnings growth. A stock with a PEG ratio of less than 1 is often seen by the GARP investor as meeting their value criteria.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

delicious | digg | reddit | facebook | technorati | stumbleupon | chatintamil

Leave a Comment

You must be logged in to post a comment.

« Investing and Market Sentiment | Home | Investing in Bond Mutual Funds »