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.
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GARP Metrics – Mix of Growth & Value Metrics
The GARP approach helps identify 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.
Strong earnings growth history and impressive 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.
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.
- 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 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.) Read: Use Return on Equity (ROE) To Better Evaluate the Potential Returns Of A Company’s Stock
- 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.) Read: The P/E Ratio: Its Strengths and Limitations
These few criteria have narrowed down the universe of over 7,700 stocks to only 16. Here are 7 of the 16 stocks that made it through the screen:
1. VMware, Inc. (VMW) provides virtualization solutions from the desktop to the data center. The company delivered an average four-quarter positive earnings surprise of 3.8%. It carries a Zacks Rank #1.
2. Best Buy Co., Inc. (BBY) is a leading retailer of technology products, services, and solutions. In the last four quarters, the stock surpassed the Zacks Consensus Estimate thrice. However, it has an average positive earnings surprise of 19.1%. The stock sports a Zacks Rank #1.
3. Ebix, Inc. (EBIX) is a leading international supplier of software and e-commerce solutions to the insurance industry. The company delivered an average four-quarter positive earnings surprise of 8.2% and carries a Zacks Rank #2.
4. Cognizant Technology Solutions Corporation (CTSH) is a leading provider of custom software development, integration and maintenance services that link e-business with core information systems for companies worldwide. The company delivered an average four-quarter positive earnings surprise of 3.2% and carries a Zacks Rank #2.
5. Dollar General Corporation (DG) is a discount retailer in the United States. The company came up with an average four-quarter positive earnings surprise of 3.7% and carries a Zacks Rank #2.
6. Fiserv, Inc. (FISV), a Fortune five hundred company, provides information management systems and services to the financial and insurance industries. Last quarter, the Zacks Rank #2 stock delivered a positive earnings surprise of 2.9%.
7. Big Lots, Inc. (BIG) is the nation’s largest broadline closeout retailer. It operates retail stores that sell food, home furnishings, furniture, merchandise, and other household items. The Zacks Rank #2 stock has beaten the Zacks Consensus Estimate in the trailing four quarters, the average positive earnings surprise of 12.3%.
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