Stocks that have impressive growth prospects but are undervalued may prove to be one of the best investment options in the equity market. The strategy of finding stocks on the basis of the above criteria is widely known as growth at a reasonable price or GARP. This strategy is particularly profitable in markets that are witnessing a strong rebound after a massive slump.
However, one should not confuse GARP investing with the blend strategy. While the blend strategy seeks to invest in both value and growth stocks, GARP investing requires both value and growth features in a single stock.
Key Features of GARP
The GARP strategy seeks to offer an ideal investment by borrowing the best features of both value and growth investing. While investors following the GARP strategy give precedence to value ratios such as price-to-earnings (P/E) and price-to-book value (P/B) ratio, they also use earnings per share (EPS) growth rates and return on equity (ROE) like growth investors to identify potential stocks. However, the range of the values of metrics that are considered by GARP investing may differ from those that are considered by value or growth investors.
While value investors look for an extremely low P/E ratio to choose a company, the GARP strategy focuses on acquiring stocks that have relatively higher ratios but less than their respective industry average. Meanwhile, GARP investing chooses stocks with P/B ratios lower than their industries similar to value investors.
Separately, investors following the GARP strategy give priority to stocks with an impressive EPS growth track record over those with extremely high growth rates. Companies that qualify GARP investing are believed to have past as well as expected growth rates over the next few years between 10% and 20%.
Another metric, which is borrowed by GARP investors from growth investing, is return on equity (ROE). Like growth investors, the GARP strategy looks for stocks with higher ROE than their industry average.
Along with the criteria we discussed in the above section, we have also considered favorable Zacks Rank – Zacks Rank #1 (Strong Buy) or #2 (Buy) – to make the strategy more profitable.
• Zacks Rank less than or equal to #2
(Only Strong Buy and Buy rated stocks can get through.)
• 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.)
• P/E and P/B ratios less than X-industry average
(P/E and P/B ratios less than that of the industry indicate that the stocks are undervalued.)
Just these few criteria have narrowed down the universe of over 7,700 stocks to only five.
Here are the five stocks that made it through the screen:
AngioDynamics Inc. ANGO is a leading provider of innovative medical devices used by interventional radiologists, vascular surgeons and other physicians. It has an average four-quarter positive earnings surprise of 16.2% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Luxoft Holding, Inc. LXFT offers software development services and information technology solutions. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 19.3%.
Boston Scientific Corporation BSX is a worldwide developer, manufacturer and marketer of minimally invasive medical devices. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 6.3%.
Popeyes Louisiana Kitchen, Inc. PLKI owns, operates and franchises a chain of quick-service restaurants. This Zacks Rank #2 stock has an expected earnings growth rate of 10.4% for the current year compared with the industry average of 8.6%.
Thermo Fisher Scientific, Inc. TMO provides analytical instruments, equipment, reagents and consumables, software, and services for research, manufacturing, analysis, discovery, and diagnostics. This Zacks Rank #2 stock has an average four-quarter positive earnings surprise of 1.5%.
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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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THERMO FISHER (TMO): Free Stock Analysis Report
ANGIODYNAMICS (ANGO): Free Stock Analysis Report
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