In doing a GARP screen the other day, I was surprised by the top five picks it turned up. But before I reveal their names, you might be wondering, "What the heck is GARP?"
If you've never heard of GARP, it has nothing to do with the John Irving novel "The World According to Garp." GARP's roots go back to a 1949 book, "The Intelligent Investor," by Benjamin Graham, which has the distinction of being called "the best book on investing ever written" by Warren Buffett.
Known as the father of security analysis and value investing, Graham believed investors should consider both future growth (measured through fundamentals) and present price of a stock to identify value.
I set my GARP screen to evaluate companies based on dividend growth rate, trailing price-to-earnings (P/E) and price-to-book (P/B) ratios, earnings per share (EPS) growth, revenue and current ratio. I scored each of the six indicators against the benchmarks using a simple 1-100 scale. For example, if the P/E for a company was 10 and that was better than 90% of all other stocks, that company got a score of 90. I added up the scores and divided by six for the overall score.
What an interesting group I ended up with: The top five picks are relative unknowns and range from fertilizers to fragrances, with poultry, starch and trucking in between.
The top overall score went to CF Industries (CF), an Illinois-based manufacturer and distributor of fertilizer products. With a $10.8 billion market cap, it is the second-largest publicly traded nitrogen fertilizer producer in the world and the third-largest producer of phosphate fertilizer.
The company considers itself undervalued and has embarked on a $3 billion stock buyback program. Given the repurchases this year alone are nearly $1.1 billion, CF may be done sooner than its 2016 target date. (Coincidentally, activist investor and hedge fund manager Daniel Loeb took a significant stake in the company in the second quarter.)
CF is also investing in expansion: It's one of the first companies bringing on new fertilizer capacity in North America. Its annual dividend yield is 0.9%, but it's trading at a significant discount to its historical average, with a current P/E ratio of 6.5 compared with a five-year average of 11.1.
Inter Parfums (IPAR) is a U.S.-based maker and marketer of fragrances. The company avoids celebrity licensing deals and concentrates on prestige brands like Lanvin, Montblanc, Karl Lagerfeld, Jimmy Choo and Boucheron.
In the past six months, Inter Parfums has launched four new products, taken over marketing of the Alfred Dunhill brand, and sold back perfume licensing rights to Burberry, which added a chunk of cash to its already excellent balance sheet. Although Inter Parfums has raised its sales and earnings forecasts several times this year, it generated EPS of $1.15 in the first half of this year, exceeding its own expectations by a penny a share. The company pays a dividend yield of 1.7% and has a P/E ratio of 5.8.
Industrias Bachoco (IBA), a Mexican-based poultry producer, is one of the largest chicken companies in the world and has a market cap of $2 billion. In 2011, it bought U.S.-based O.K. Industries, another chicken producer. The company is sitting on a sizable amount of cash -- nearly $10 a share -- so it's possible Industrias Bachoco is considering another acquisition.
The company's second-quarter chicken sales volume decreased 1.1% as a consequence of an outbreak of avian flu. The company also sustained a one-time additional charge in relation to the outbreak. The supply for all the companies other main products were unaffected. The company has an extensive hedging portfolio with derivative positions for corn, soybean meal and interest rates.
Industrias Bachoco, which trades as an ADR (American depositary receipt), has a P/E of 8.1 and a dividend yield of 1.3%.
Based in Nebraska, AMCON Distributing (DIT) has two divisions. The wholesale distribution division delivers more than 14,000 consumer products to 5,000 retail outlets across the U.S. On the retail side, the company operates 15 health food retail stores through the Midwest and Florida. A small company, AMCON has a market cap of just $51.4 million, a P/E ratio of 9.0 and a dividend yield of 0.9%.
Illinois-based Ingredion (INGR) makes and sells starches and sweeteners. Formerly known as Corn Products International, this century-old company has a market cap of $4.9 billion. In addition to having pantry staples such as Argo, Karo and Mazola in its portfolio, Ingredion's products are used by customers in the food, beverage, brewing, animal feed, paper and corrugated materials industries.
Ingredion has a large global footprint: Its products are sold in 40 countries, and nearly 45% of its sales are from outside the U.S. Because its products are derived primarily from processing corn and other starch-based materials such as tapioca, potatoes, rice and sugar, the company hedges its exposure to commodity fluctuations. It also hedges for its energy needs and currency fluctuations. INGR has a dividend yield of 2.4%, the best of the bunch, and a P/E of 11.6.
Risks to Consider: Investors need to exercise their own preferences when using the GARP method, a hybrid of value and growth investing, and must rely on their own interpretation of a company and their own judgment. Note that returns for GARP stocks are very different from those stocks chosen for pure value or pure growth investment. During a bull market, the growth-only strategy would be preferable. GARP investors tend to do better in a bear market.
Action to Take --> With stock prices ranging from $40 to nearly $200, none of these stocks is cheap to get into in absolute terms. If you'd like to look for your own GARP bargains, traditional GARP investing looks for companies that have the lowest price/earnings-to-growth (PEG) ratios, as opposed to P/E multiples. This method would lead investors to Inter Parfums, which has the lowest PEG ratio of the five.
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