If you are looking for a profitable portfolio of stocks offering the best value and growth investing, try the growth at a reasonable price or GARP strategy.
The strategy helps investors gain exposure to undervalued stocks with impressive prospects. Unlike a blend strategy, a portfolio that uses GARP investing is expected to include stocks that offer the best of both value and growth investing. W.W. Grainger GWW, Ameriprise Financial AMP, Grand Canyon Education LOPE and Texas Roadhouse TXRH are some GARP stocks that hold promise.
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 prefer buying stocks 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.
Both a 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 a tactic of GARP investors. Hence, growth rates between 5% and 20% are considered ideal under the GARP strategy.
Another growth metric that both growth and GARP investors consider is the return on equity (ROE). GARP investors look for a strong and higher ROE than the industry average to identify superior stocks. Moreover, stocks with positive cash flows find precedence under the GARP plan.
GARP investing prioritizes the popular value metrics — the price-to-earnings (P/E) ratio and the price-to-book (P/B) 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.
Using the GARP principle, we ran 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 Zacks Rank #1 (Strong Buy) or 2 (Buy).
Last 5-year EPS & projected 3-5-year EPS growth rates between 5% and 20% (Strong EPS growth history and prospects ensure improving business.)
ROE (over the past 12 months) greater than the industry average (Higher ROE than the industry average indicates superior stocks.)
P/E and P/B ratios less than the M-industry average (P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
Here are four of the five stocks that made it through the screen:
W.W. Grainger is a broad-line, business-to-business distributor of maintenance, repair and operating products and services, operating primarily in North America, Japan and the U.K. The company currently carries a Zacks Rank #2. You can see the complete list of today's Zacks #1 Rank stocks here.
W.W. Grainger has a trailing four-quarter earnings surprise of 10.1%, on average. The Zacks Consensus Estimate for W.W. Grainger’s 2022 earnings has moved 4.4% north to $29.31 per share over the past 60 days.
Ameriprise Financial is a financial services company, which offers financial planning and advice via its broad range of products and services to customers. The company currently carries a Zacks Rank #2.
Ameriprise Financial has a trailing four-quarter earnings surprise of 4.83%, on average. The Zacks Consensus Estimate for AMP’s 2022 earnings has moved 2.5% north to $24.56 per share over the past 60 days.
Grand Canyon Education is an accredited provider of online post-secondary education services focused on offering graduate and undergraduate degree programs in its core disciplines of education, business and healthcare. The company currently carries a Zacks Rank #2.
Grand Canyon Education has a trailing four-quarter earnings surprise of 4.79%, on average. The Zacks Consensus Estimate for LOPE's 2022 earnings has moved 3.9% north to $5.85 per share over the past 60 days.
Texas Roadhouse is a full-service, casual dining restaurant chain, which offers an assortment of specially seasoned and aged steaks on the premises and cooked to order over open grills. The company currently carries a Zacks Rank #2.
Texas Roadhouse has a trailing four-quarter earnings surprise of 11.24%, on average. The Zacks Consensus Estimate for 2022 earnings has moved 5.4% north to $4.07 per share over the past 60 days.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks' portfolios and strategies are available at: https://www.zacks.com/performance.
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